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CORPORATE GOVERNANCE AND PERFORMANCE OF
MICROFINANCE INSTITUTIONS: A CASE STUDY OF RWANDA
TOMBOLA MASERERI GUSTAVE
A THESIS SUBMITTED IN FULFILLMENT OF THE REQUIREMENTS
FOR THE DEGREE OF DOCTOR OF PHILOSOPHY IN BUSINESS
MANAGEMENT OF THE OPEN UNIVERSITY OF TANZANIA
2012
i
CORPORATE GOVERNANCE AND PERFORMANCE OF
MICROFINANCE INSTITUTIONS: A CASE STUDY OF RWANDA
TOMBOLA MASERERI GUSTAVE
A THESIS SUBMITTED IN FULFILMENT OF THE REQUIREMENTS FOR
THE DEGREE OF DOCTOR OF PHILOSOPHY IN BUSINESS
MANAGEMENT OF THE OPEN UNIVERSITY OF TANZANIA
2012
ii
CERTIFICATION
The undersigned certify that they have read the Thesis and hereby recommend for
acceptance by The Open University of Tanzania the Thesis titled “Corporate
Governance and Performance of Microfinance Institutions: A Case Study of
Rwanda” in fulfilment of the requirements for the Degree of Doctor of Philosophy in
Business Management.
………………………………
Dr. Chacha Alfred Matoka
(Lead Supervisor)
……………………………………
Date
Dr. Ssemwanga Adrew
(Supervisor)
………………………………
Date
iii
COPYRIGHT
No part of this thesis may be reproduced, stored in any retrieval system, or
transmitted in any form by any means, electronic, mechanical, photocopying,
recording or otherwise without prior written permission of the author or The Open
University of Tanzania in that behalf.
iv
DECLARATION
I, Tombola Masereri Gustave, do hereby declare that this thesis is my original work
and has not been presented for any degree award in any other university. No part of
this thesis may be produced without prior permission of the author/ or by The Open
University of Tanzania.
……………………………………………
Tombola Masereri Gustave
……………………………………………
Date
v
DEDICATION
To the Almighty God, for being my guide during the darkest moments;
To my Parents, for they perfectly fulfilled their responsibilities of making me loving
the path to school;
To the family of Honorable Senator Professor Dr RWIGAMBA Balinda for the
encouragement and assistance to finish my PhD programme;
To the family of Alphonse Rukomera Macumu for its kindness and generosity;
With compassion to General Laurent Nkunda Mihigo whose selfishless remains as a
model to our entire large family.
In particular;
To my kids, Dorcas GWIZA, Nelson GANZA, Smart TUNGA and Gift TUZA,
for keeping my memory alive during moments of absence;
Be lifted, Jennifer BAMURANGE, my wife, for your courage, your support, and
for bringing up our kids while busy with my studies; your will has now become a
reality;
If I could, I would give you whatever you want, stars, moon in the sky and so forth,
but you may accept everlasting love as your compensation.
Tombola Masereri Gustave
vi
ACKNOWLEDGEMENTS
At the end of my PhD programme at The Open University of Tanzania, I would like
to thank all who contributed in one way or another in order to make me reach this
level.
My everlasting appreciations go to my nuclear family for being patient in waiting for
the realization of this feat. It has become a reality and joyful moments have set in for
a long time to come.
My sincere appreciations go to my father, mother, brothers, sisters, and relatives for
their moral support, contribution, and encouragements. My appreciatios also go to
my brothers and sisters in law and hope their expectations have also been realized. I
also wish to etend sincere appreciations to my in laws, especially my mother in law,
my brothers and sisters inlaw for encouraging me to pertake this huge project. Their
wish has also become a reality.
I am greateful to all MFIs which accepted to collaborate in availing me relevant
information for this study and to the Central Bank of Rwanda for allowing me to
pursue my research on the MFIs in Rwanda.
My thanks go to Dr Chacha Matoka and Dr Andrew Ssemwanga, my supervisors, for
their time spent together in guiding and refurbishing my research skills. To Kigali
Independent University community, and to everyone who has assisted me to conduct
the research and especially to the entire family of “Abaha” my high appreciations are
extended to all of you. May the almighty God bless you!
vii
ABSTRACT Being a developing country, Rwanda is struggling with the culture of saving and credits by poor but economically active population. Given that this portion of the population generally does not access the classic banking system, it becomes client of the microfinance institutions to grow up their culture of banking. The microfinance institutions mobilize savings from its clients and use the savings to finance the economic activities of their clients in form of loans. In 2006, some MFIs failed to reach their performance due to many factors most of which have not yet been researched. The study was led by one question which states thus: Is there a link between corporate governance is linked to the performance of MFIs. Whilst there have been many studies carried out to determine whether there is a link between corporate governance and corporate performance, the evidence appears to be fairly mixed. To show evidence of good performance, MFIs have to reach out to all places in the country and impact on the lives of their clients and to ensure their own sustainability. Given the fact that corporate governance is a new and wide concept, the researcher considered some of its components such as board size, board composition, non-CEO duality and the supervision of MFIs to assess the performance of MFIs in Rwanda. The researcher used survey methods using a questionnaire, an interview and focus group to gather data to be used for finding out the correlation between the corporate governance and the performance of MFIs in Rwanda. The questionnaire designed by the researcher was found to be valid and reliable through the review of peers in universities in Kigali and the Cronbach’s Alpha yielded a reliability coefficient of .949. The probabilistic and non-probabilistic sampling techniques were used to collect data. Simple random sampling technique was selected as probabilistic technique while judgemental and quota sampling techniques were selected as non-probabilistic techniques. Using descriptive statistics like frequency and correlation calculations thanks to the cross tabulation, the relationship between corporate governance and performance of MFIs in Rwanda was found. The researcher concluded that some components of corporate governance have a correlation with the performance of MFIs in Rwanda and others have no correlation with the performance of MFIs in Rwanda. For the board size and corporate governance and the performance of MFIs, the results were mixed. The findings on the correlation between board composition and performance of MFIs were also mixed. The same thing applies for the supervision of MFIs and their performance. The researcher found that there is correlation between the non-CEO duality and the performance of MFIs in Rwanda. Future researchers may tackle the link between other aspects of corporate governance and the performance of MFIs.
viii
TABLE OF CONTENTS
CERTIFICATION ................................................................................................... ii
COPYRIGHT ......................................................................................................... iii
DECLARATION .................................................................................................. iv
DEDICATION ....................................................................................................... v
ACKNOWLEDGEMENTS .................................................................................. vi
ABSTRACT ......................................................................................................... vii
LIST OF TABLES .............................................................................................. xiii
LIST OF FIGURES .......................................................................................... xviii
LIST OF APPENDICES ..................................................................................... xix
LIST OF ABBREVIATIONS .............................................................................. xx
CHAPTER ONE .................................................................................................... 1
1.0 INTRODUCTION ............................................................................................ 1
1.1 Background of the study..................................................................................... 1
1.2 Statement of the Research Problem ................................................................... 7
1.3 Objectives ..................................................................................................... 10
1.3.1 General Objective ....................................................................................... 10
1.3.2 Specific Objectives ..................................................................................... 10
1.4 Research Hypotheses..................................................................................... 10
CHAPTER TWO ................................................................................................. 12
2.0 LITERATURE REVIEW .............................................................................. 12
2.1 Introduction ..................................................................................................... 12
2.2 Definition of Key Concepts ............................................................................. 12
ix
2.3 Review of Theories of Corporate Governance .................................................. 14
2.3.1 Agency theory .............................................................................................. 14
2.3.2 Transaction cost economics theory ............................................................... 16
2.3.3 The Stakeholder theory ................................................................................. 19
2.3.4 Stewardship theory ........................................................................................ 20
2.4 Theories on Performance of MFIs ................................................................... 21
2.4.1 The welfarist theory ..................................................................................... 21
2.4.2 The institutional studies or financial approach theory ................................... 22
2.5 Origin of Corporate Governance ..................................................................... 23
2.6 Microfinance Institutions and Corporate Governance ...................................... 25
2.6.1 Corporate governance stakeholders .............................................................. 25
2.6.2 Analyzing performance of MFIs .................................................................... 27
2.6.2.1 Measuring outreach to the customers .......................................................... 28
2.6.2.2 Measuring sustainability ............................................................................. 28
2.6.2.3 Measuring welfare-impact on customers ..................................................... 29
2.7 Models of Corporate Governance ................................................................... 30
2.7.1 Corporate Governance in Continental Europe ................................................ 30
2.7.2 Corporate governance in Central and Eastern Europe .................................... 30
2.7.3 Corporate governance in the Asia-Pacific ...................................................... 31
2.7.4 Corporate governance in South Africa, India and Brazil ................................ 32
2.8 Discussion on Corporate Governance ............................................................... 33
2.8.1 Benefits of good corporate governance .......................................................... 33
2.8.2 Separation of ownership and control .............................................................. 36
2.8.3 Board of directors .......................................................................................... 40
x
2.8.4 Election of directors .................................................................................... 40
2.8.5 Board responsibilities .................................................................................... 42
2.8.6 Board size ..................................................................................................... 44
2.8.7 Board composition ........................................................................................ 45
2.8.8 Separation of Chairmanship of the board and CEO ........................................ 47
2.8.9 Supervision ................................................................................................... 47
2.8.9.1 Accounting functions ................................................................................. 48
2.8.9.2 Auditing ..................................................................................................... 52
2.8.9.3 Internal control and risk management ......................................................... 52
2.8.9.4 Internal auditing ......................................................................................... 53
2.8.9.5 External audit ............................................................................................. 55
2.10 MFIs’ Responsibility and Citizenship ............................................................. 57
2.10.1 MFIs’ social responsibility ......................................................................... 57
2.10.2 MFI’s citizenry ............................................................................................ 58
2.10.3 Role of MFIs as citizen................................................................................ 60
2.11 Review of the Empirical Studies..................................................................... 62
2.11.1 Researches on Microfinance ........................................................................ 62
2.11.2 Corporate governance and corporate performance studies............................ 66
2.12 Research Gap ................................................................................................ 71
2.13 Theoretical Framework ................................................................................. 72
2.14 Conceptual Framework of the Study............................................................... 78
CHAPTER THREE ............................................................................................. 80
3.0 RESEARCH METHODOLOGY ................................................................. 80
3.1 Introduction .................................................................................................... 80
xi
3.2 Research paradigm ........................................................................................... 80
3.3 Research Design.............................................................................................. 80
3.3.1 Description of the Research Area ................................................................. 81
3.3.2 Population of the study ................................................................................. 82
3.3.3 Sample and Sampling techniques ................................................................. 83
3.4 Research Instruments ..................................................................................... 86
3.4.1 Questionnaire ................................................................................................ 86
3.4.2 Interviews .................................................................................................... 89
3.4.3 Documentary review ..................................................................................... 90
3.5 Validity of the Research Instruments ............................................................... 90
3.6 Reliability of Research Instruments ................................................................. 91
3.7 Data Analysis .................................................................................................. 94
3.8 Ethical Considerations ..................................................................................... 95
CHAPTER FOUR................................................................................................ 96
4.0 RESEARCH FINDINGS, DATA ANALYSIS AND DISCUSSION ........... 96
4.1 Introduction .................................................................................................... 96
4.2 Identification of Respondents ......................................................................... 96
4.3 Board Size and Performance of MFIs in Rwanda ..........................................100
4.3.1 Small Size of the Board of MFIs and performance of MFIs .........................100
4.3.2 Big size of board and performance of MFIs ..................................................107
4.3.5 Testing the hypothesis number one ..............................................................113
4.4 Board Composition and Performance of MFIs in Rwanda .............................130
4.4.1 Outsiders’ board members and performance of MFIs ..................................131
4.4.3 Insiders’ board members and performance of MFIs .....................................139
xii
4.4.3 Testing the hypothesis number two...............................................................148
4.5 Supervision and Performance of MFIs in Rwanda ..........................................163
4.5.1 Independent audit and performance of MFIs ................................................163
4.5.2 Internal audit and performance of MFIs in Rwanda .....................................172
4.6.3 Testing the hypothesis number four ..............................................................181
4.7 Discussion of Findings ...................................................................................196
4.7.1 Size of board of directors and performance of MFIs in Rwanda ...................196
4.7.2 Board composition and performance of MFIs in Rwanda ...........................200
4.7.3 Supervision and performance of MFIs in Rwanda ......................................204
CHAPTER FIVE ................................................................................................210
5.0 SUMMARY OF FINDINGS, CONCLUSIONS AND
RECOMMENDATIONS .........................................................................210
5.1 Introduction ....................................................................................................210
5.2 Summary of findings ......................................................................................210
5.3 Implications of the results ...............................................................................211
5.4 Conclusions ....................................................................................................212
5.5 Recommendations .........................................................................................215
5.6 limitations of the study ....................................................................................217
5.7 Area for Further Research ...............................................................................217
REFERENCES ...................................................................................................219
APPENDICES .....................................................................................................230
xiii
LIST OF TABLES
Table 3.1: Sample Size........................................................................................... 85
Table 3.2: Reliability test ....................................................................................... 91
Table 3.3: Reliability test on small size of board of directors and performance of
MFIs in Rwanda .................................................................................. 92
Table 3.4: Reliability test on big size of board of directors and performance of MFIs
in Rwanda............................................................................................ 92
Table 3.5: Reliability test on outsider board members and performance of MFIs in
Rwanda ............................................................................................... 92
Table 3.6: Reliability test on insider board members and performance of MFIs in
Rwanda ............................................................................................... 93
Table 3.7: Reliability test on independent audit and performance of MFIs in Rwanda
............................................................................................................ 93
Table 3.8: Reliability test on internal audit and performance of MFIs in Rwanda ... 93
Table 4.1: Distribution of Respondents by their gender 96
Table 4.2: Distribution of respondents by their age ................................................ 97
Table 4.3: Distribution of respondents by their marital status ................................. 98
Table 4.4: Distribution of respondents by their study background .......................... 98
Table 4.5: Distribution of respondents by their qualification .................................. 99
Table 4.6: Frequency on small size and social living conditions ............................100
Table 4.7: Frequency on small size and economic living conditions ......................101
Table 4.8: Frequency on small size and number of customers ...............................103
xiv
Table 4.9: Frequency on small size of a board and number of loans extended to
customers ...........................................................................................104
Table 4.10: Frequency on small size and debt recovery .........................................105
Table 4.11: Frequency on small size and profitability ............................................106
Table 4.12: Frequency on big size and social living conditions..............................108
Table 4.13: Frequency on big size and economic living conditions........................108
Table 4.14: Frequency on big size and number of customers ................................109
Table 4.15: Frequency on big size and number of loans ........................................110
Table 4.16: Frequency on big size and debt recovery ............................................111
Table 4.17: Frequency on big size and profitability ...............................................112
Table 4.18: Size of the board and social living conditions Crosstabulation ............114
Table 4.19: Chi-Square Tests of the size of the board and social living conditions.116
Table 4.20: Size of the board and economic living conditions Crosstabulation ......117
Table 4.21: Chi-Square Tests of the size of the board and the economic living
conditions ...........................................................................................119
Table 4.22: Size of the board and number of customers Cross tabulation ...............120
Table 4.23: Chi-Square Tests of the size of the board and the number of customers
...........................................................................................................122
Table 4.24: Size of the board and number of loans Crosstabulation .......................123
Table 4.25: Chi-Square Tests of the size of the board and the number of loans ......125
Table 4.26: Size of the board and debt recovery Crosstabulation ...........................126
Table 4.27: Chi-Square Tests of the board size and the debt recovery....................127
Table 4.28: Size of the board and profitability Crosstabulation ..............................128
Table 4.29: Chi-Square Tests of the size of the board and profitability ..................129
xv
Table 4.30: Frequency on outside/independent/nonexecutive members of the board
and social living conditions .................................................................130
Table 4.31: Frequency on outside/independent/nonexecutive members of the board
and economic living conditions ...........................................................132
Table 4.32: Frequency on outside/independent/nonexecutive members of the board
and number of customers ....................................................................133
Table 4.33: Frequency on outside/independent/nonexecutive mebers of the board and
number of loans ..................................................................................135
Table 4.34: Frequency on outside/independent/nonexecutive members of the board
and debt recovery................................................................................136
Table 4.35: Frequency on outside/independent/nonexecutive members of the board
and profitability ..................................................................................138
Table 4.36: Frequency on inside/non independent/executive and social living
conditions ...........................................................................................139
Table 4.37: Frequency on inside/non independent/executive and economic living
conditions ...........................................................................................141
Table 4.38: Frequency on inside/non independent/executive and number of
customers ...........................................................................................142
Table 4.39: Frequency on inside/non independent/executive and number of loans .144
Table 4.40: Frequency on inside/non independent/executive and debt recovery .....145
Table 4.41: Frequency on inside/non independent/executive and profitability .......147
Table 4.42: Board composition and social living conditions Crosstabulation .........149
Table 4.43: Chi-Square Tests of the correlation between board composition and the
social living conditions .......................................................................150
xvi
Table 4.44: Board composition and economic living conditions Cross tabulation ..151
Table 4.45: Chi-Square Tests of the correlation between the board composition and
economic living conditions .................................................................153
Table 4.46: Board composition and number of customers Crosstabulation ............154
Table 4.47: Chi-Square Tests of the correlation between the board composition and
the number of customers .....................................................................155
Table 4.48: Board composition and number of loans Crosstabulation ....................156
Table 4.49: Chi-Square Tests of the correlation between the board composition and
the number of loans ............................................................................158
Table 4.50: Board composition and debt recovery Crosstabulation ........................159
Table 4.51: Chi-Square Tests of the correlation between the board composition and
the debt recovery ................................................................................160
Table 4.52: Board composition and profitability Crosstabulation ..........................161
Table 4.53: Chi-Square Tests of the correlation between the board composition and
the profitability ...................................................................................162
Table 4. 54 : Frequency on independent auditing and social living conditions .......164
Table 4.55: Frequency on independent auditing and economic living conditions ...165
Table 4.56: Frequency on independent auditing and number of customers ............166
Table 4.57: Frequency on independent auditing and number of loans ....................168
Table 4. 58 : Frequency on independent auditing and debt recovery ......................169
Table 4.59: Frequency on independent auditing and profitability...........................171
Table 4. 60 : Frequency on internal auditing and social living conditions ..............173
Table 4. 61 : Frequency on internal auditing and economic living conditions ........174
Table 4. 62 : Frequency on internal auditing and number of customers ..................176
xvii
Table 4. 63 : Frequency on internal auditing and number of loans .........................177
Table 4. 64 : Frequency on internal auditing and debt recovery .............................179
Table 4. 65 : Frequency on internal auditing and profitability ................................180
Table 4. 66 : Supervision and social living conditions Cross tabulation .................182
Table 4. 67: Chi-Square Tests of the correlation between the supervision and the
social living conditions .......................................................................183
Table 4. 68: Supervision and economic living conditions Crosstabulation .............184
Table 4. 69 : Chi-Square Tests of the correlation between the supervision and the
economic living conditions .................................................................186
Table 4. 70 : Supervision and number of customers Crosstabulation .....................187
Table 4. 71: Chi-Square Tests of correlation between the supervision and the number
of customers .......................................................................................188
Table 4. 72: Supervision and number of loans Crosstabulation ..............................189
Table 4. 73: Tests of correlation between the supervision and the number of loans 191
Table 4.74: Supervision and debt recovery Crosstabulation ...................................192
Table 4.75: Chi-Square Tests of correlation between the supervision and the debt
recovery ..............................................................................................193
Table 4. 76 : Supervision and profitability Crosstabulation....................................194
Table 4.77: Chi-Square Tests of correlation between the supervision and the
profitability .........................................................................................195
xviii
LIST OF FIGURES
Figure 2.1: Main Theories Influencing Corporate Governance ............................... 21
Figure 2.2: Relationship among stakeholders in industry ........................................ 27
Figure 2.3: International Corporate Governance ..................................................... 32
Figure 2.4: Relationship among Stakeholders, monitors and controllers ................. 38
Figure 2.5: Theoretical model of the study ............................................................. 77
Figure 2.6: The conceptual framework of the study ................................................ 79
xix
LIST OF APPENDICES
Appendix I: Acceptance letter ..............................................................................230
Appendix II: Questionnaire ...................................................................................231
Appendix III: Interview guide ...............................................................................236
Appendix IV: Research clearance letter from OUT ..............................................240
Appendix V: Letter asking for data collection permission from the National Bank of
Rwanda ..........................................................................................241
Appendix VI: Data collection permission from the National Bank of Rwanda .......242
Appendix VII : Chi Square (critical values) ..........................................................243
xx
LIST OF ABBREVIATIONS
% - Percentage
CalPERS - California Public Employees Retirement System
CEO - Chief Executive Officer
H (o) - Nul hypothesis
ICGN - International Corporate Governance Network
MFIs - Microfinance Institutions
OUT - Open University of Tanzania
1
CHAPTER ONE
1.0 INTRODUCTION
1.1 Background of the study
As the microfinance industry comes of age, there are claims that microfinance
institutions need to improve the quality of their corporate governance mechanisms
in order to become more effective in their business (CSFI, 2008). However, little
scientific knowledge exists as to what constitutes effective corporate governance
mechanisms in the MFI industry.
Participating in the debate on analysing the performance of organisations, Tvorik
and McGivern (1997) consider the economic rates of return for both economic
and organisational factors. This means that to use the economic factors as the only
basis of analysis may lead to misevaluation of the performance of an organisation.
They further argue that organisational alignment and competitive advantage
approaches may also be used to evaluate the performance of organisations.
However, whereas the alignment approach emphasizes organisational structure
and environment but neglects strategic positioning, the competitive advantage
approach emphasizes competitive strategy but neglects internal organisational
attributes. For this matter, a good performance evaluation needs to combine the
two approaches without neglecting any aspect.
In a study on the determinants of organisational performance, Tvorik and
McGivern (1997) conclude that organisational performance should be evaluated
on the basis of returns on invested capital, assets, and sales. Their findings can be
2
criticized because they based performance evaluation on economic factors only.
In another study, Luzzi and Weber (2006) combined outreach and sustainability to
measure the performance of Microfinance Institutions. According to them, the
factors that determine the performance of Microfinance Institutions are not clearly
known.
Rhyne (1998) considered those two main goal areas to be a win-win situation,
claiming that those MFIs that follow the principles of good banking will also be
those that alleviate the most poverty, Woller et al., (1999); Morduch (2000) think
that the proposition is far more complicated. In this study, the researcher intends to
throw light on this controversy by using financial, outreach and impact as measures
of performance of MFIs and to look at the impact of governance upon them.
Luzzi and Weber (op.cit.) may be criticized for their methodological approach in this
regard. They took 45 Microfinance Institutions without stating whether this was the
total number of agreed institutions or what proportion of the total number it was.
Further more, they considered six variables in evaluating the performance of
Microfinance Institutions among which only one was for financial sustainability i.e.
operational self-sufficiency (Total revenues/Total expenses). It would be better to
include variables such as returns on assets and returns on invested capital as Tvorik
and McGivern (1997) suggested.
To identify the evidence regarding the effectiveness of various governance
mechanisms and characteristics to achieve organisational performance, Willekens &
Sercu (2005) consider Belgian listed companies. In their study, they addressed the
3
following governance mechanisms: board of directors, the audit committee, the
internal control and the internal audit function, and the external audit. As already
pointed out, the researchers focused themselves on Belgian companies only. In
addition to that, their research limited itself to the internal aspects of corporate
governance. Another criticism that can be raised here is that the research did not
consider management as a part of corporate governance in those companies (Yuwa,
2003).
There is no gainsaying of that fact that the Principal-Agent Theory is generally
considered as the starting point for any debate on the issue of corporate governance.
Indeed, the theoretical underpinnings for extant research in corporate governance
come from the classic theories, the modern corporate and private property, by Berle
and Means (1932). The thesis describes a fundamental agency problem in modern
firms where there is a separation of ownership and control or management. It has
long been recognized that modern organisations suffer from a separation of
ownership and control. These organisations are run by professional managers
(agents), who are unaccountable to dispersed shareholders (principals). This view fits
into the principal-agent paradigm.
In this regard, the fundamental question is how to ensure that managers follow the
interests of shareholders in order to reduce cost associated with principal-agent
theory. Hence, to ensure the performance of the organisation, one has to consider
aspects of management. Principals have to select capable managers and give them
the right incentives to put forth the appropriate effort and make decisions aligned
with shareholders interests.
4
Jensen and Meckling (1976) defined agency relationship and identified agency costs.
Agency relationship is a contract under which one or more persons (principal)
engage another or others (agent) to perform some services on behalf of principal,
which involves delegating some decision-making authority to the agent. Conflict
between managers or controlling shareholders, and outside or minority shareholders
refer to the tendency that the former may extract perquisites out of firm’s resources
and less interested to pursue new profitability ventures. Agency costs include, as
Jensen and Mecklin (1976) define, monitoring expenditures by the principal and
compensation systems, bonding expenditures by the agent and residual loss due to
divergence of interests between the principal and the agent. Reducing these costs for
any organization, especially the conflict of interest, may lead to its performance.
In 1932, Berle and Means wrote what was to become a famous book about the
corporate form of business. They pointed out that corporations were becoming so
large that the ownership and control was separated. The stockholders own the firm
and managers (technically, officers or executives) control the firm, that is the
principal agency theory, the authors said. This situation comes because the thousands
or even hundreds of thousands of investors who own firms cannot collectively make
the daily decisions needed to operate a business. Hence, there is a need for
specialized management. There is a problem with this separation of ownership and
control. Why would the managers care about the owners? If owners are not vigilant,
managers will seek self-serving gratification in the form of perks, power, and/or
fame; this is known as principal-agent problem or the agent problem in corporate
governance. The shareholders (owners) are the principals and the managers are the
5
agents who are supposed to work for the owner. If the owners cannot effectively
monitor the managers’ behaviour, then managers may be tempted to use the firms’
assets for their own ends, all at the expense of shareholders, Berle and means said as
cited by Kim, Nofsinger and Mohr (2010). The mid-level managers of corporations
are monitored by executives; these are also controlled by board of directors
appointed to run the corporations on behalf of shareholders. The executives are
appointed by the nominated board of directors; it means that they are accountable to
the board of directors. To align managers to the shareholders’ objectives and solving
the agent problem, board of directors has to provide incentives and a proper
monitoring system of managers, this system may be strengthening the internal and
external auditing committee
The monitoring group is made by board of directors, auditors and government
agencies as Kim, Nofsinger and Mohr (2010) said. By providing incentives and a
good monitoring to the executives and to the entire corporation, one may assume that
performance will be achieved. To achieve the performance of firms, the modern
evolution of stakeholders’ view, that is shareholders, creditors, employees and
society at large, of the firm advocates that management develop specific relationship
with stakeholder groups as Kim et al., (2010) said. Proponents of this view argue that
companies have a social obligation to operate in ethically, scially, and
environmentally responsible ways.
This active approach is referred to as corporate social responsibility or corporate
citizenship (Kim, Nofsinger and Mohr, 2010; Fischer and Lovell said, 2009). For a
6
company, to achieve the corporate social responsibility, it should conduct its
business in a manner that meets four levels of its expectations; that are economic,
legal, ethical, and philanthropy, as the above authors argued.
The first and foremost social responsibility of a firm is economic. The firm must
survive by producing goods and services at a profit. The society expects firms to
operate their businesses within a legal framework, being the second level. The third
level of the corporate social responsibilities is ethical; these responsibilities are those
over and above the ones codified in laws and are in line with societal norms and
customs. The fourth level is philanthropy driven; corporate giving is discretionary,
although increasingly desired by stakeholder communities.
The agency theory brings in the agency effect as Fischer and Lovell suggested
(2009). This effect assumes that people are, at heart, untrustworthy. As a result of
privileged position that exclusive directors enjoy over shareholders with regard to the
control of information, executive directors are deemed likely to exploit this power
situation to their own advantage. This might manifest itself in managing information,
hence the importance of the audit function, and large remuneration packages, the
authors argue.
The Rwandan microfinance industry has to resolve the conflict of interest between
principal and agent, owners and executives, in order to have a real focus on reaching
many clients and impacting on them and, having commitment to sustainability by
integrating the corporate governance mechanisms. This needs to be studied in order
7
to give clear insights about the relationship between corporate governance and the
performance of Microfinance Institutions in Rwanda.
Any measurement of the performance of an organisation ought to consider corporate
governance in all its dimensions (Rock et al., 1998). As an external or internal
component of governance, they exert a crucial influence on the performance of
Microfinance Institutions. Youssoufou’s findings on performance of organisations
were focused on a case study of Burkina Faso; the case may not fit in other parts of
the world, especially Rwanda as a post conflict country.
1.2 Statement of the Research Problem
Youssoufou (2002) concluded in his study that apart from the level of outreach and
the degree of self-sustainability, the performance of Microfinance Institutions should
also be measured on the basis of the impact of these institutions on the livelihood
(poverty alleviation) of their clients. The three variables which are used to measure
the performance of MFIs is called “Critical Micro-finance Triangle” (Litan, 2007;
Kereta, 2007). Meeting the gap between demand and supply of credit in the formal
financial institutions frontier has been challenging as Pischke cited by Kereta (2007)
said. In fact the gap is not aroused merely because of shortage of loanable fund to the
poor rather it arise because it is costly for the formal financial institutions to lend to
the poor. Nevertheless, in several developing countries governments have intervened,
through introduction of microfinance institutions to minimize the gap then allow the
poor access credits. To evaluate the performance of MFIs, one needs to look at the
critical MFIs Triangle.
8
In his study on the Chinese corporate governance, Yuwa (2003) observed that some
countries have developed corporate governance systems and have been accepted as
models of corporate governance systems. But if a model of corporate governance is
too far from the reality of a country then its influence on the organisational
performance will be reduced (Yuwa, 2003).
Microfinance is a significant and growing industry in Rwanda with around eight four
certified MFIs and other still on the demand process and low income generating
Rwandans are interested in being clients of that sector (Rwanda/NEPAD, 2007). In
addition to that, the report of National Bank of Rwanda (2011) says that the
Rwandan microfinance industry has got 74, 819 active borrowers, 319,899
depositors, 29,7 million of US dollar and 32,3 million of US dollar as loans issued.
Yet there is no study that explores the link between governance and performance of
such a growing industry, this may be because of the industry being just new and
emerging in the country (Microfinance Policy in Rwanda, 2006). There have been a
number of high profile MFIs’ collapses, nine MFIs failed, that have been evidenced
in Rwanda despite the fact that the annual report and accounts stated the opposite
(NMP, 2006). These MFIs collapses have had an adverse effect on many
stakeholders. Shareholders have seen their financial investment reduced to nothing;
employees have lost their jobs and, in many cases, the security of their company
pension has been threatened and even evaporated overnight; suppliers of goods or
services have also been affected due to failed MFIs; clients who deposited their
money in those MFI have also been affected; and also the economic impact on the
local communities at large in which the failed MFIs operated.
9
In essence, the MFIs’ failure affected all Rwandans at large, being the supervision
body, clients, suppliers and the political authorities. Problems of corporate failure
may bring in some questions as Mallin (2010) says - such as “why have such failures
happened”? “What should be done to prevent such failures happening again?” “How
can the stakeholders’ confidence be restored?” Mallin (2010) said that answers to
these questions are all linked to corporate governance, that is to say, lack of effective
corporate governance meant that such collapses could occur. Good corporate
governance can help prevent such collapses happening again and restore investors’
confidence. Since 1994 the Government of Rwanda has certified the establishment of
many MFIs and at the same time closed down some of them after operating for only
a few years because of poor performance and others have collapsed from them to
operate. The study observed events that took place in Rwanda since the end of 2005 -
when the government of Rwanda started to close down some Microfinance
Institutions (National Microfinance Policy, 2006), given the report of the National
Bank of Rwanda, nine MFIs failed; according to the same report the reasons were
related to governance issues such as lack of supervision from the National Bank of
Rwanda, lack of a permanent eye from the boards of directors on the management,
and so forth. No research has been undertaken to analyze the linkage between that
failure and the way MFIs are governed in Rwanda.
This study aimed to contribute to the existing debate on the performance of
Microfinance Institutions and the influence of governance on that performance. The
researcher contributed to the literature in a developing post-conflict economy, such
as Rwanda. There is a need to measure the performance of Microfinance Institutions
employing the MFI Triangle that is the three variables namely; outreach,
10
sustainability and impact on the citizens and identifying relationship which exists
among corporate governance mechanisms and variables of Microfinance institutions’
performance; to get performance, Kereta (2007) said, these three variables have to be
measured. This triangle was also brought in CGAP (2009) which says that whoever
would wish to evaluate the performance of MFIs has to tackle the three aspects of
them. These aspects touch all the stakeholders in the microfinance sector, being
clients, suppliers, shareholders and the community at large in order to be corporate
social responsive.
1.3 Objectives
This section addresses broad objectives and specific objectives.
1.3.1 General Objective
To investigate on the relationship between the corporate governance and the
performance of Microfinance Institutions in Rwanda.
1.3.2 Specific Objectives
1. To determine whether or not there is a correlation between the board size of the
board and the performance of microfinance institutions in Rwanda
2. To find out whether there is a correlation between the board composition and the
performance of Microfinance Institutions in Rwanda
3. To determine whether or not there is a correlation between supervision and the
performance of microfinance institutions in Rwanda
1.4 Research Hypotheses
This section aims at showing the research hypotheses the researcher attempted to
verify through the findings. A hypothesis is a tentative solution to a problem. The
11
hypotheses of this study were stated in nul form and were symbolized as HO. The
following null hypotheses were tested:
Ho (1): There is no correlation between the size of the board of directors and the
performance of microfinance institutions in Rwanda.
Ho (2): There is no correlation between the board composition and the performance
of microfinance institutions in Rwanda.
Ho (3): There is no correlation between the supervision and the performance of
microfinance institutions in Rwanda.
1.5 Significance of the study
This study contributes to the existing debate on the performance of Microfinance
Institutions and the influence of governance on that performance. The researcher is
contributing to the literature in a developing, post-conflict economy such as Rwanda.
There is need to measure the performance of Microfinance Institutions employing
the MFI Triangle that is the three variables namely; outreach, sustainability and
impact on the citizens and identifying relationship which exists among variables as
far as Microfinance institutions’ performance is concerned.
The significance of this study is to examine the performance of Microfinance
Institutions in Rwanda and the correlation between governance and the performance
of Microfinance Institutions in Rwanda.
12
CHAPTER TWO
2.0 LITERATURE REVIEW 2.1 Introduction
Chapter two discusses the related literature to this study. The literature was taken
from books, journals, government reports, MFIs reports and information from the
Internet. This chapter specifically reviewed literature that was pertinent to the
influence of various corporate governance mechanisms on the different indicators of
the performance of MFIs.
2.2 Definition of Key Concepts
Corporate governance: Kumar (2010) defines corporate governance as an umbrella
term that includes specific issues arising from interactions among senior
management, shareholders, boards of directors, and other stakeholders it is
understood as the system or the set of mechanisms by which organisations are
directed, controlled in order to achieve their organizational objectives. Defined
broadly by Okeahalam and Akinboade (2003), corporate governance refers to the
private and public institutions, including laws, regulations and accepted business
practices which govern the relationship between corporate managers and
entrepreneurs or owners of the corporate. To this study corporate governance refers
to the mechanism stakeholders use in order to move companies for the attainment of
their performance.
Board of Directors: According to the Institute of Directors (Kumar, 2010), the board
of directors is a body set by shareholders to ensure the company’s prosperity by
13
collectively directing the company’s affairs, whilst meeting the appropriate interests
of its shareholders and other relevant stakeholders. Mallin (2010) defines board of
directors as a body set by stakeholders and which is collectively responsible for the
success of the company. The researcher refers to this concept in line with the second
author given that her definition captures even the first one. The concept of board of
directors is important for this study for the fact that it is one of the corporate
governance mechanisms which may have a relationship with the performance of
MFIs in Rwanda.
Board size: Is referred to as the number of people making the board of directors as
Mallin (2010) says. Lipton and Lorch (1992) recommended limiting the number of
directors on a board to seven or eight, as numbers beyond that it would be easy for
the CEO to control. The literature refers to the board size as the actual number of
board members responsible for the success of the company, and the researcher
considers as small size of the board of directors of not more than five board members
NMP (2006). This concept is important for this study for it is one of the corporate
governance mechanisms which may have a relationship with the performance of
MFIs in Rwanda.
Board composition: The concept means the structure of the board of directors as far
as the independent and dependent board members are concerned as Kumar (2010)
and Mallin (2010) say. The literature seems to have that same definition ass a
universal one as Mallin (2010) says. The researcher considers the concept in the
same understanding of the above mentioned authors. This concept of board
14
composition is important for this study for the fact that it helps to measure the level
of independence of directors, corporate governance characteristic, which may have a
relationship with the performance of MFIs in Rwanda.
Microfinance Institutions (MFIs): They are financial institutions aiming at supplying
of financial services to micro enterprises and poor families according to Robinson
(2001), Ledgerwood (1999); Schreiner (2002) and this was also pointed out by
Mersland (2008). The study understands the MFIs as the above mentioned authors
defined it. According to Rwanda, the microfinance is any mode of finance designed
to provide low income individuals with the means to become self sufficient, it is any
form of financial institution issuing small loans to those marginalized from the
normal mode of finance with the intention of help poor prosper by allowing them to
save and to borrow little money (Rwanda Microfinance Forum, 2009).
2.3 Review of Theories of Corporate Governance
Given that many disciplines have influenced the development of corporate
governance, the theories that have fed into it are quite varied. The main theories that
may affect the development of corporate governance are: agency theory, transaction
cost economic theory, stakeholder theory, and stewardship theory.
2.3.1 Agency theory
A significant body of work has built up in this area within the context of principal-
agent framework. The work of Jensen and Mecklin (1976) as pointed in their work,
theory of the firm: managerial behaviour, agency costs, and ownership structure
pointed in particular, the importance of this theory; and of Fama and Jensen (1983)
15
as said, in their study, agency problems and residual claims, that this theory is the
most important in studing performance of MFIs. The agency theory identifies the
agency relationship where one party - the principal, delegates work to another party,
the agent as Mallin (2010) says in her study corporate governance. The agency
relationship can have a number of disadvantages related to the opportunism or self
interest of the agent as Helms (2006) says in its study on access for all: building
inclusive financial system; for example the agent may not work in the interest of the
princil, or the agent may act only partially in the best interest of the principal.
There can be a number of dimensions to this, including the agent misuse his power
for pecuniary or other advantages, and agent not taking appropriate risks in
pursuance of the principal’s interests because the agent views those risks as not being
appropriate and the principal may have different attitudes to those risks (Mallin,
2010). There is also a problem of information asymmetry whereby the principal and
the agent have access to different levels of information; in practice. This means that
the principal is at a disadvantage because the agent will have more information
(Kumar, 2010).
In the context of corporations and issues of corporate control, agency theory views
corporate governance mechanisms, especially board of directors, as being an
essential monitoring device to try to ensure that any problems that may be brought
about by the principal-agent relationship, are minimized (Kumar, 2010).
Managers are supposed to be the agents of the corporation’s owners, but managers
must be monitored and institutional arrangements must provide some checks and
16
balances to make sure they do not abuse their power as Helmalin and Weisbach
(1991) say in their study; the effects of board composition and direct incentives on
firm performance. The costs resulting from the misusing their position, as well as the
costs of monitoring and disciplining them to try to prevent abuse, have been called
agency costs (Kim, 2010).
Much of agency theory as related to corporations is set in the context of the
separation of ownership and control as described in the work of Berle and Means
(1932) in their work on the Modern Corporation and private property, and also on the
work of Mallin (2010). In this context, the agents are the managers and the principal
are the shareholders, and this is the commonly cited agency relationship in the
corporate governance context. However, it is useful to be aware that the agency
relationship can also cover various other relations including those of company and
creditors, and of employer and employee. The essence of this research takes its roots
from the agency theory perspective as it focuses on the supervisory aspects of
corporate governance to reduce the agency costs and improve performance.
2.3.2 Transaction cost economics theory
The transaction cost economics theory, as expanded by the work of Williamson in
1975 (Mallin, 2010), is often viewed as closely related to the agency theory. The
transaction costs economics theory views the firms as a governance structure
whereas agency theory views a firm as a nexus of contracts as Daily and Dalton
(1992) show in their work on the relationship between governance structure and
corporate performance in entrepreneurial firms. Essentially the later means that there
17
is a connected group or series of contracts amongst the various players, arising
because it is seemingly impossible to have a contract that perfectly aligns the
interests of principal and agent in a corporate control situation (Mallin, 2010).
In the afore mentioned discussion of agency theory, the issue of separation of
ownership and control was emphasized. As firms have grown in size, whether caused
by the desire to achieve economies of scale, or due to technological advances, or by
the fact that natural monopolies have evolved, they all have increasingly required
more capital rose from the capital markets and from established wider shareholder
base.
The problems of separation of ownership and control and the resultant corporate
governance issues have thus arised. Coase as cited in Mallin (2010) examined the
rationale for firms’ existence in the context of a framework of the efficiencies of
internal, as opposed to external, contracting. Coase said that the operation of a
market costs something and by forming an organization and allowing some authority,
like an entrepreneur, to direct the resources, certain marking costs are saved. The
entrepreneur has to carry out his function at less cost, taking into account the fact that
he may get factors of production at a lower price than the market transactions which
he supersedes as Gee (1992) points out in his study on the financial aspects of the
corporate governance. In other words, there are certain economic benefits to the firm
itself to undertake transactions internally rather than externally. In its turn, a firm
becomes larger the more transactions it undertakes and will expand up to the point
where it becomes cheaper or more efficient for transaction to be undertaken
18
externally (Kumar, 2010). Coase therefore posits that firms may become less
efficient the larger they become. Equally, he states that all changes, which improve
managerial techniques, will tend to increase the size of the firm. Williamson cited in
Mallin (2010) stated that the costs of any misaligned actions may be reduced by
judicious choice of governance structure rather than merely realigning incentives and
pricing them out. Heart cited by Mallin (2010) indicated that there are number of
costs to writing a contract between the principal and agent, which include the cost of
thinking about and providing for all the different eventualities that may occur during
the course of contract, the cost of negotiating with others, and costs of writing the
contract in an appropriate way so that it is legally enforceable. These costs tend to
mean that contracts are apt to be incomplete in some way and so contracts will tend
to be revisited as and when any omissions or required changes come to light as
pointed out by Jenkinson and Mayer (1992) in their work on the assessment:
corporate governance and corporate control. In case of incomplete contracts,
governance structure does have a role to play; governance structure can be seen as a
mechanism for making decisions that have not been specified in the initial contract
(Kumar, 2010; Mallin, 2010).
Both agency theory and the transaction cost economics theory are concerned with
managerial discretion, and both assume that managers are given to opportunism for
self interests seeking and moral hazard, and that managers operate under bounded
rationality and both regard the board of directors as a instrument of control, in this
context, bounded rationality means that managers will tend to be self interested
rather than maximizing the profit; this of course, not being in the best interest of
19
shareholders (Mallin, 2010). In addition to the agency theory, this study borrows
from this theory as the manager sees the board as his controller.
2.3.3 The Stakeholder theory
Juxtaposed with the agency theory is the stakeholder theory. This theory takes
account of a wider group of constituents rather than focusing only on shareholders
(Mallin, 2010). The consequence of focusing on shareholder is that the maintenance
or enhancement of shareholder value is paramount, whereas a wider stakeholder
group, such as employee, providers of credit, customers, suppliers, government, and
local community, is taken into account, the overriding focus on shareholder value
becomes less self evident. Nonetheless, many companies do strive to maximizing
shareholder value and at the same time trying to take into account the interests of a
wider group of stakeholders. One rationale for effectively privileging shareholder
over other stakeholders is that they the recipient of the residual free cash flow
(Mallin, 2010), being the profits remaining once other stakeholders, such as loan
creditors, have been paid. This means that the shareholders have a vested interest in
trying to ensure that resources are used to the maximum effect, which in turn should
be to the benefit of society as a whole (Mallin, 2010). Shareholders and stakeholders
may favour different corporate governance mechanisms; the first favour the so called
Anglo-Amercian model of corporate governance values the shareholders rights,
while the later is favoured by the German model of corporate governance. Within
this model, stakeholders such as employees, have a right enshrined in law for their
representatives to sit on the supervisory board alongside the directors. The
20
shareholders and the stakeholder group have a link to this study as far as the aspect
of impact is concerned in terms of the conceptual framework.
2.3.4 Stewardship theory
The stewardship theory draws on the assumptions underlying agency theory and the
transaction cost economics theory. The work of Donaldson and Davis as cited by
Mallin (2010) cautioned against accepting the agency theory as a given and
introduced an alternative approach to corporate governance, which is the stewardship
theory. The agency theory is relying on the control of managerial opportunism by
having a board chair independent of the CEO and using incentives to bind the CEO
interests to those of shareholders. The stewardship theory stresses the beneficial
consequences on shareholders returns of facilitative authority structures which unify
command by having roles of CEO and Chair held by the same person. The
safeguarding of returns to shareholders may be along the track, not of placing
management under greater control by owners, but of empowering managers to take
autonomous executive action (Mallin, 2010) and (Kumar, 2010). The stewardship
theory complements the agency theory in the sense that it gives more autonomy and
incentives to the management, rather than making a tight supervision to the senior
management, as this may create a climate of subordinate to chief; as a consequence
the company may suffer from that angle because the management holds the
information for the company (Mallin, 2010).
After analyzing all the theories associated with the development of corporate
governance, this study of corporate governance and performance of microfinance
21
institutions; a case of Rwanda, is grounded into the agency theory and the
stakeholder theory. The performance of MFIs is looked at various aspects, outreach,
impact and sustainability; the three dimensions of performance of MFIs are in those
above mentioned corporate governance theories. The following is the Figure 2.1
showing the various theories which influence the development of corporate
governance.
Figure 2.1: Main Theories Influencing Corporate Governance
Source: Mallin, 2010
2.4 Theories on Performance of MFIs
There are two theories related to the analysis of performance of Microfinance
Institutions. They are the welfarist theory and the institutional studies or financial
approach theory (Youssoufou, 2002; Yaron, 1994; World Bank, 1989; Pischke et
al., 1983).
2.4.1 The welfarist theory
This theory contends that a microfinance institution is regarded to be performing
well when it is able to reach the greatest number of the poor people and provides
them with financial services at a low cost (Youssoufou, 2002). This theory is
Agency Theory
Transaction Cost Economics Theory
Stewardship Theory
Stakeholder Theory
Corporate Governance
22
considered to be “welfarist” because it leads to high unpaid rates and transaction
costs, resulting in failure Joanna (2010) as discussed in her work titled
Microfinance Handbook: institutional and financial perspectives. Based on this
theory; the variables that are used to measure performance in this theory are
outreach and impact. This approach focuses on the logic of subsidization. This
theory is linked to this study by the fact that it helps to know what the measures of
the performance of MFIs are; these are the outreach and the impact on the welfare
of the customers. Outreach, as Kereta (2007) says measures how the microfinance
institution reaches a big number of clients and issues to them loans; if a
microfinance does not increase the number of clients and the number of loans,
then its performance is poor as far as outreach is concerned. The same author
Kereta (2007) added by saying to reach many clients with high number of loans
does not suffice, what matters more is how do those loans affect the living
conditions of clients; the author refers to this as impact. CGAP (2009) added that
without combining these two variables in assessing the performance of MFIs, no
sponsor can issue any sponsorship, because this is a full assessment of
performance of MFIs as far as the welfarist approach is concerned.
2.4.2 The institutional studies or financial approach theory
This second theory is an approach characterized by the will to liberalize financial
markets. It completes with the first one by arguing that in order to evaluate
performance of Microfinance Institutions, one has to combine the two theories using
variables such as outreach and sustainability. According to these authors, a
Microfinance Institution performs well whenever it bases itself on either financial
23
outreach or financial sustainability. This second theory is similar to the study of
Tvorik and McGivern (1997) about the determinants of organizational performance,
since both of them have the same understanding of the concept of performance. They
consider financial variables to decide whether or not a Microfinance Institution is
performing well (Worldbank, 1989).
To either achieve the sustainability and the real outreach, MFIs have to make an
assistive programme to borrowers of money so that the loans may make a socio-
economic impact on their clients. If this is not achieved, MFIs will not get paid back
the distributed loans in order to redistribute to others and so reach the outreach via
sustainability. This study measures the performance of MFIs, using the variables
suggested under these theories on performance of MFIs.
2.5 Origin of Corporate Governance
Capitalism is an economic system of business based on private enterprise.
Individuals own lands, farms, factories, and equipment, and they use these assets in
an attempt to earn profits (Kim et al., 2010). Capitalism provides rewards for COEs
and other senior executives who work hard and who are inventive and creative
enough to figure out new or improved products and or services, as Kim et al. (2010)
posits. One potential reward for creating value in an economy is the accumulation of
personal wealth. The wealth incentive provides the energy to generate new ideas and
to foster economic value that provides jobs and raises our standards of living as
Weisbach (1988) says in his study outside directors and CEO turnover.
24
The main goal of a corporate is to create a conducive environment to earning long
term profits that is one indicator of performance (Kim et al., 2010), which stem from
two main sources. First, the large portion comes from the current and future profits
of the products and or services the corporate provides to its customers. Finding ways
to increase profits from these core operations can also increase the economic value.
Second, profit can come from the growth of sales of an existing product or from
introducing new products.
The ability to access capital and to control risk is an important factor for the success
or failure of the firm as Yermack (1996) says. Expansion usually requires additional
money that must be raised by companies; at the same time risk is there as there is no
guarantee that new products or services will meet customer expectations or that
existing ones will continue to be successful on the market. As these are important
attributes for companies, capital requirements and risk sharing affect the manner in
which a corporate is organized and managed in order for the company to get profit
and to sustain as Sandra et al. (2003) point out.
Corporate governance was not an important topic before 1980s as Kim et al., (2010)
say. In the aftermath of the Stock Market crash of 1987 there were a large number of
corporate collapses caused by corporate failure on a global basis. Corporate
governance has since caught the public’s attention. Since the 1990s, the discussion
on corporate governance in legal and economic literature has become intensive
(Inglis and Sammut, 2006). Continued economic globalization, growing negative
public opinion about board effectiveness and new regulatory and political pressure
25
have been the joint forces bringing attention to the subject of corporate governance
(Kim et al., 2010).
2.6 Microfinance Institutions and Corporate Governance
This section first describes different forms of MFIs, with emphasis on the publicly
traded corporations. It describes also the structure of publicly traded corporations,
including the separation of owners and managers that is required to effectively run
such companies. As this separation means that the owners of companies do not
control day-to-day operations, there is a manager to take actions other than those that
owners would prefer. An integrated system of checks and balances known as
corporate governance has evolved to address this potential conflict (Kim et al.,
op.cit.). Throughout this section, parties which have an impact on the governance of
MFIs are outlined.
2.6.1 Corporate governance stakeholders
Corporate governance is concerned with creating a balance between economic and
social goals and between individual and communal goals while encouraging efficient
use of resources, accountability in the use of power and stewardship and aligning the
interests of individuals, corporations and society (Okeahalam and Akinboade, 2003).
It also encompasses the establishment of an appropriate legal, economic and
institutional environment that allows companies to thrive as institutions for
advancing long term shareholder value and maximum human centered development
while remaining conscious of their other responsibilities to stakeholders, the
environment and the society in general, the authors argued (Okeahalam and
Akinboade, 2003).
26
Corporate governance is concerned with the processes, systems, practices and
procedures as well as the formal and informal rules that govern institutions, the
manner in which these rules and regulations are applied and followed, the
relationships that these rules and regulations determine or create, and the nature of
those relationships (Kumar, 2010). It also addresses the leadership role in the
institutional framework, (Mallin, 2010). Corporate governance, therefore, refers to
the manner in which the power of a corporation is exercised in stewardship in the
corporation’s total portfolio of assets and resources with the objective of maintaining
and increasing shareholder value and satisfaction of other stakeholders in the context
of its corporate mission, (Okeahalam and Akinboade, 2003). Corporate governance
implies that companies not only maximize shareholders, employees, customers,
suppliers, and investors so as to achieve long-term sustainable value, (Okeahalam
and Akinboade, 2003).
From a public policy perspective, corporate governance is about managing an
enterprise while ensuring accountability in the exercise of power, (Deakin and
Mayer, 1997). Although there are differences in details, the general agreement is that
corporate governance is a system or a process of directing and controlling the
corporation (Gee, 1992). In terms of scope of corporate governance, some believe
the view that corporate governance concerns only relationship among the corporation
and its shareholders, executives and employees and productive efficiency and
effectiveness. Others believe that it concerns all relevant laws, culture, and questions
about distribution of profits and assumption of risk (Kim et al., 2010). Figure 1.1
shows the details about the corporation and corporate governance.
27
Figure 2.2: Relationship among stakeholders in industry
Source: Kim et al., (2010).
The various mechanisms of corporate governance which are having a significant
influence on the performance of organisations are board size, board composition,
CEO duality and the supervision (Kim et al., op.cit.).
2.6.2 Analyzing performance of MFIs
Poverty is the major problem in most developing economies, (Kereta, 2007). In these
economies, it is argued that among other factors, absence of access to financial
services is presumed to be the cause for the failure of the poor to come out of
poverty. Let us review in detail how MFIs are measured in terms of meeting their
performance as the author Meyer (2002) said that is looking at the following
indicators: outreach to the poor, financial sustainability and impact positively on the
welfare of the poor. The CGAP (2009), in its research on core performance
indicators for microfinance, pointed out the core areas for performance analysis of
the microfinance; these are outreach (breath) which means how many clients are
being served, the outreach (Depth) or impact which means how are the clients
Management Investment Consultants
Auditors Accountants Creditors Analysis
Regulators Board
28
improving as far as their poverty is concerned and the sustainability meaning how
well is the MFI collecting its loans and is the MFI profitable enough to maintain and
expand its services without relying on injections of subsidized donor funds.
2.6.2.1 Measuring outreach to the customers
Outreach, at glance, refers to the number of clients served by an organization. But
Meyer (2002) noted that outreach is a multi-dimentional concept. In order to measure
outreach we need to look into different dimensions. The first is simply the number of
persons now served that were previously denied access to formal financial services.
Usually these persons will be the poor because they cannot provide the collateral
required for accessing formal loans (Meyer, 2002). Another criterion is the number
of women served. Women often face greater problems than men in accessing
financial services. Finally, the variety of financial services, that is the number of
loans distributed to those needing them.
2.6.2.2 Measuring sustainability
The other indicator of performance of MFIs is its sustainability. Different literatures
noted that sustainability is one of the areas that we need to look at to assess the
performance of MFIs. Meyer (2002), Litan (2007) and Kereta (2007) noted that the
poor need to have access to financial service on long-term basis rather than just a one
time financial support. Short-term loan worsens the welfare of the poor (Najas et al.,
2000). Meyer (2002) also stated that the financial unsustainability in the MFI arises
due to low repayment rate or unmaterialization of funds promised by donors or
governments. According to Meyer (2002), Kereta (2007) and Litan (2007), there are
29
two kind of sustainability we could observe in assessing MFIs performance: Loan
recovery and profitability. The first being when loans issued can be recovered by
MFIs and the second being covering other operational costs like salaries, suppliers,
loan losses and other administrative costs. According to Kereta (2007) and Litan
(2007) outreach and financial sustainability are complimentary; this is because as the
number of client increases MFIs enjoy economies of scale and hence reduce costs
which help them to financial sustainable. Regarding indicators of financial
sustainability of MFIs, Khandker et al. (1995) pointed out that the most important is
loan repayment or debt recovery because low default rate would help to realize
future lending.
2.6.2.3 Measuring welfare-impact on customers
Welfare impacts of the services of MFIs are also argued to be another indicator to
evaluate the performance of MFIs. As indicated, one of the objectives of MFI is
reducing poverty. Hence, this implies that we need to assess the impact of the MFIs’
programmes on reducing poverty to evaluate their performance. According to the
World Bank report as cited by Meyer (2002), poverty is viewed as lack of money,
lack of adequate food, shelter, education and health and the poor are vulnerable to ill
health, economic dislocation and natural disaster.
Authors like Ledgerwood (1999), Meyer (2002), Kereta (2007), and Litan et al.,
(2007) said that this perspective of poverty can be used to assess the impact of MFIs
on the clients who receive MFIs’ services or loans. Given the prevailing challenges,
however, in the assessment process of the impact of MFIs on their clients, several
30
impact indicators are noted in literatures. Mostly the impact indicators are
categorized as economic and social living conditions or benefits as suggested by
Ledgewood (1999), Kereta (2007). The MFIs are for the double bottom line a social
bottom line as well as a financial bottom line. This is a way of saying that a
reasonable profit is necessary to support the continuous investment needed to sustain
and improve services offered by MFIs, (Michael, 2007).
2.7 Models of Corporate Governance
2.7.1 Corporate Governance in Continental Europe
A difference in the understanding of corporate governance is seen within the
corporate governance models in the European continent. Spurred by the development
of capital markets, the influence of institutional investors, and a growing desire for
more transparency and disclosure following various high-profile financial scandals
across the globe, continental Europe has responded by improving its corporate
governance to provide increased disclosure and accountability (Mallin, 2010).
Although corporate ownership structures may differ across Europe, and some
countries have a unitary board whilst others have have a dual board, there does seem
to be agreement on some of the fundamental aspects of corporate governance that is
leading towards a convergence of corporate governance in key areas (Mallin, 2010).
2.7.2 Corporate governance in Central and Eastern Europe
After reviewing the different approaches that were used in the privatization of state
owned enterprises in the former Union of Socialist Soviet Republics (USSR), the
effect of each approach on the resultant ownership and control of privatized
31
companies, and the implications for corporate governance developments were
different, (Mallin, 2010). Countries in Central and Eastern Europe are keen to
improve protection of minority shareholders rights, and to establish more confidence
in their capital markets to attract foreign direct investment. All of the countries have
already published corporate governance codes of best practice, (Mallin,2010 and
Kumar, 2010).
2.7.3 Corporate governance in the Asia-Pacific
The financial downturn that affected countries in the Asia-pacific in the 1990s came
as a great shock. The so-called tiger economies had seen their stock markets
experience meteoric rises and then that golden situation was wiped out, (ibid). This
change in fortunes led to many questions as to how and why this could have
happened, but also as to how they would be able to rebuild themselves and attract
investors back to their stock markets.
The lack of transparency and disclosure, the misuse of corporate assets by dominant
shareholders, and the lack of protection for minority shareholders’ interests have all
been seen as contributory factors to the demise, and as areas that need to be
improved in order to rebuild economies and attract both domestic and overseas
investment, (Kumar, 2010 and Mallin, 2010). All countries in this part of the world
have all strengthened their corporate governance codes, which recommend fuller
disclosure and accountability, transparency of process, the appointment of
independent directors, the recognition and protection of the minority shareholders’
rights. Because of that, all the region seems to be moving in the right direction and
32
the changes encourage more foreign direct investment and greater confidence in the
stock markets (Mallin, 2010).
2.7.4 Corporate governance in South Africa, India and Brazil
The corporate governance of these three countries of different cultural influences,
legal systems, and corporate governance structures has some commonalities of
approach to their corporate governance codes. South Africa and India having a
unitary board while Brazil a two tier board system, all of them emphasize on
transparency, and accountability, and they have a desire to enhance the protection of
minoriry shareholders’ rights, (Mallin, 2010). There is an emphasis on the
importance of having a balanced board with an appropriate proportion of
independent directors, and also recognition that a company cannot operate in
isolation but should consider the interests of its various stakeholder groups, Mallin
(2010) continues. To these countries, it is to be expected that corporate governance will improve, as countries seek to attract international investment and maintain investor confidence.
Figure 2.3: International Corporate Governance
Source: The author
Continental Europe Central Eastern Europe
Asia Pacific South Africa, India and Brazil
Models of Corporate Governance
33
After analyzing the various models of corporate governance, Rwanda seems to fit in
this last model even though it is not hundred per cent.
2.8 Discussion on Corporate Governance
2.8.1 Benefits of good corporate governance
Good corporate governance ensures that organizations are well-run institutions that
earn the confidence of investors and lenders as Akinboade and Okeahalam (2003)
said. The process ensures safeguards against corruption and mismanagement, while
promoting fundamental values of a market economy in a democratic society. These
are quite critical for most African economies that are struggling to attract foreign
direct investment, the authors continued (ibid).
The quality of governance is of absolute importance to shareholders as it provides
them with a level of assurance that the business of the company is being conducted
in a manner that adds shareholder value and safeguards assets Akinboade and
Okeahalam (2003) said. This means that there is less uncertainty associated with the
investment; a situation that encourages bankers and lenders to be favourably
disposed to the company Akinboade and Okeahalam said. If a company adopts and
implements good corporate governance practices, shareholders are retained and new
investors attracted as the above authors argued (2003). Hence, good corporate
governance is necessary as Kim et al., (2010) in order to attract investors both local
and foreign ad ensure them that their investment will be secure and efficiently
managed, and in a transparent and accountable process. This is seen through even the
implementation of good governance principles.
34
Kim et al., (2010) further argues that good corporate governance creates competitive
and efficient companies and business enterprises, good corporate governance being
securing good relationship among all stakeholders of a corporation and complying
with the rules and regulations, it will enhance the efficiency of the corporation and
create the competitiveness to corporations lacking good governance principles.
Good corporate governance enhances accountability and performance of those
entrusted to manage corporations (Kim et al., 2010). When shareholders start a
corporation, they are driven by the profit maximization. Then if good corporate
governance governs the corporate, the agent will be accountable to the principle and
this accountability will lead to the performance or the achievement of the objectives.
Kim further argues that good corporate governance promotes efficient and effective
use of limited resources. The relationship between the agent and the principle
generates the misuse of resources by the first as he or she knows that the resources
belong to someone else; but with the rules and regulations provide the sanctions of
the misuse of resources and the rewards for maximization of profit by the agent.
Corporate governance enhances the performance and ensures the conformance of
corporations. Its principles stimulate the performance of corporations by creating and
maintaining a business environment that motivates managers and entrepreneurs to
maximize firm’s operational efficiency, returns on investment and or on equity and
long term productivity growth Kim et al., (2010); Akinboade and Okeahalam (2003).
They ensure corporate conformance with investors’ and society’s interests and
expectations by limiting the abuse of power and the wastage of corporate resources,
35
so called agency problem, (Akinboade and Okeahalam, 2003). Simultaneously, the
establish the means to monitor managers’ behaviour to ensure corporate
accountability and provide for the cost- effective protection of investors’ and
society’s interests vis- a - vis corporate insiders.
Without efficient companies or businesses, a country will not create wealth and
employment as Akinboade and Okeahalam (2003) said. They further argue that
without investment, companies will stagnate and collapse. If businesses do not
prosper, there will be no economic growth; no employment, no taxes paid and
invariably the country will not develop. Developing countries - in particular, need
well-governed and managed companies that can attract investors, create jobs and
wealth and remain viable, sustainable and competitive in the global market place.
Good corporate governance, therefore, becomes a prerequisite for national economic
development and performance of companies. Globally, especially in developing
countries companies face various challenges in implanting corporate governance. We
can list some of them( Akinboade and Okeahalam, 2003).
The first challenge is the structure of ownership and control. Most of the developing
economies are based on small or medium sized companies with the
soleproprietorship as the business ownership. The owner does everything as he or
she understands. From this perspective it will be very hard to implement corporate
governance.
The second challenge is the interlocking relationships with government and the
financial sector; in developing countries where by most of them the ruling form is a
36
dictatorship, the government officials interfere in the financial sector, not as
supervision authority but as getting any advantage from the financial institutions.
This leads to Foreign Direct Investors to fear invest in such developing country.
The third challenge is the weak civil and judicial systems. As indicated above the
dictatorial governments do not allow the growth of a civil society and the juridical
system is tailored to the ruling system. This creates amongst investors - whether
being local or foreign.
The fourth challenge is the absent or underdeveloped monitoring institutions. One of
the characteristics of a developed country is the existence of strong institutions.
When institutions are strong enough, the monitoring systems will be efficient and
effective because no body will interfere with them and rules and regulations will be
complied with.
The fifth challenge is the limited human resources capabilities. As everybody knows,
one of the characteristics of developing countries is lack of skilled human resources.
If human capabilities are limited in any country, investors will fear to come because
they don’t have anywhere to get human resources.
2.8.2 Separation of ownership and control
In 1932, Adolf Berle and Gardiner Means wrote what was to become a famous book
about the corporate form of business as cited by Kim et al., (2010). They pointed out
that corporations were becoming so large that the ownership and control was
separated. The stockholders own the firm and managers control it. This situation
comes about because many investors who own public firms cannot collectively make
37
the daily decisions needed to operate a business. Hence, there was a need of
specialized managers to take decisions. There is a problem with this separation of
ownership and control, Kim et al., (2010).
Why would the managers care about the owners? Kim et al., (2010) argued that with
managers being free from vigilant owners, managers would only pursue enough
profit to keep stockholders satisfied while managers sought self-serving gratification
in different forms. In the academic term, this is known as the principal-agent
problem Kim et al., (2010) or the agency problem as said before. The owner is the
principal and the manager is the agent who is supposed to work for the owner as said
by Kumar (2010). If shareholders cannot effectively monitor the manager’s
behavior, then managers may be tempted to use the firm’s assets for their own
benefits, all at the expense of the shareholders (Mallin,2010). Secretaries may take
home office supplies, mid level managers or top managers may misuse the resources
on the expense of the stockholders.
Among all employees, the agency problem is the greatest with the executives of
corporation because they have the most power and control in the corporation. Mid-
level managers have their bosses who look at expenses reports. The question lays on
who watches the executives. The primary monitor of the executives is the board of
directors of the corporation who are appointed by shareholders (Kim et al., 2010). It
is the board that appoints the executives and removes them if they take actions that
harm the corporation. However, if the shareholders are passive investors without an
incentive to monitor closely, will the shareholders make sure the board does its job?
If not, then what is to stop the executives from including the directors in the activities
38
that personally benefit them at the expense of the shareholders? When the agent has
more information and knowledge than the principal, the opportunity for the agent to
use their position to pursue self-interest increases, this means that managers have
better information and knowledge about the company than shareholders. This results
in increasing agency costs as said by Kim et al., (2010).
There are a variety of potential monitors of the actions of corporate executives that
jointly make up the current system of corporate governance. Figure 2.4 illustrates the
separation of ownership and control between stockholders and managers. In addition,
the Figure shows that monitors exist inside the corporate structure, outside the
structure, and in government.
Stakeholders Monitors Controllers
Figure 2.4: Relationship among Stakeholders, monitors and controllers
Source: Kim, Nofsinger and Mohr (2010)
The monitoring role inside corporation falls on the board of directors who oversee
management and are supposed to represent shareholders’ interests. The shareholders
Company Board of Directors Stockholders
Outside Company Auditors Analysts Bankers Credits Agencies Attorneys
Creditors
Managers
Society
Employees
Government/ IRS
39
elect directors at the annual meeting each year. These directors have a legal
obligation to represent the shareholders’ interests in running the corporation. One of
the most important roles the board carries out is to appoint the executives who will
actually run the day-to-day operations of the company. The board hires the
executives and can replace them if the board is unhappy with management for any
reason. The board can also design compensation contracts to tie management’s
salaries to the firm’s performance.
Theoretically, managers (executives) work for owners (shareholders). In reality,
because shareholders are usually inactive and the board does as management asks,
the firm actually seems to belong to management (Kim et al., 2010). Some active
shareholders have tried to influence management and/or change the directors on the
board, but they are often met with defeat. Recent evidence of unsuccessful outcomes
of shareholder proposals is quite telling. Shareholders of public corporations have the
power to make proposals that can be voted on at the annual shareholders meeting.
There are generally two types of proposals, those related to governance and those
related to investment as Berle and Means (1932) say.
A huge factor in whether a proposal is successful depends on management’s opinion.
Without management approval, proposals have little chance of succeeding. The
reason for this is that management is permitted to ask shareholders who will not be
able to attend a meeting to return proxy statements voting as management suggests
(Kim et al., 2010). Traditionally, shareholders have trusted management to know
what is best for the firm, so most passive shareholders will go along, with whatever
40
management wants. The result is that management effectively controls a large block
of votes due to the proxies of uninvolved shareholders and it is unlikely that activist
shareholders will prevail. The same issue arises in shareholders voting to replace
directors. It is difficult for outside shareholders to mount a serious challenge to the
directors nominated by the company.
2.8.3 Board of directors
When one says that a company has a board of directors, the first question which
comes is about the responsibilities. In general, a board of directors acts as the
shareholders’ agent in charge of running the day-to-day operations of the company
(Kim et al., 2010). Instead the board handles major decisions and delegates
responsibilities for everything else to corporate officers (Mallin, 2010). Hence, the
board is in charge with various activities. The board receives its authority for internal
control from stockholders of corporations, (Kumar, 2010).
2.8.4 Election of directors
Directors are elected to serve on the board by a vote of shareholders. The right to
vote in director elections is the primary way in which shareholders influence the
control of the corporation, (Kim et al., 2010). This vote depends on the voting power
of each share of stock. All the directors on the board can be removed and replaced by
shareholders for any reason or no reason, although the timing of the replacement may
vary depending on the rules in the company’s statutes or internal regulations (Kim et
al., 2010). Typically, directors can only be removed after their term office expires.
The process of replacing directors, however, is not easy at large corporations. The
biggest obstacle is the fact that individual shareholders do not have an incentive to
41
become involved in the monitoring of the corporation (Brickley et al., 1994). As
directors typically have the support of management, the company will actively
campaign amongst its shareholders to keep its directors (Kim et al., 2010). This
means that it takes a committed group of shareholders who are willing to invest large
amounts of time and money to win a voting contest against the management
supported directors. If you are a small shareholder you don’t really want to spend
your own money and time to convince other shareholders to vote for different
directors.
The above authors argue that when there is a contested vote to elect directors, this is
called a proxy fight. This proxy fight means that each side of contest tries to
persuade other shareholders to vote for their candidates for board of directors. As
most of the shareholders do not actually attend the vote because of the costs of travel
and the time requirement, they vote by filling out a proxy form that either specifies
their vote or that designates an agent to vote their shares. Hence, proxy fight
describes a process where both sides lobby the list of shareholders seeking proxy
votes in their favour.
Tests of board effectiveness include the way in which the members of the board as a
whole work together under the chairperson, whose role in corporate governance is
fundamental, and the collective ability to provide both the leadership and the checks
and balances which effective governance demands, (Brickely and James, 2010).
Shareholders are responsible for electing board members and it is in their interests to
see that the boards of the companies are properly constituted and not dominated by
any one individual (Kim et al., 2010).
42
2.8.5 Board responsibilities
No law explicitly dictates that public corporations must have a board of directors.
Instead, corporations must follow the statute of the state in which they are
incorporated. State laws vary from one state to another but every state requires that a
corporation have a board of directors. The central role of board of directors in the
strategic management of firms is firstly to critically appraise and ultimately approve
strategic action plans and secondly to evaluate the strategic leadership skills of the
CEO and others in the line of succeeding. The basic responsibilities of the board
comprise four specific roles fiduciary, strategic, supervisory and management
development (Adams and Mehran, 2003; Kim et al., 2010).
As for the fiduciary role, the board has the responsibility to safeguard the interests of
all the institutional stakeholders. As such, the board serves as a check and balance to
provide confidence to the company's investors, staff, customers, and other key
stakeholders that the managers will operate in the best interests of the institution. As
far as the strategic role is concerned, the board participates in the organizational
long-term strategy by critically considering the principal risks to which the
organization is exposed, and approving plans presented by the management. The
board does not generate corporate strategy, but instead reviews management's
business plans in light of the institution's mission, and approves them accordingly.
When it comes to the supervisory role, the board delegates the authority for
operations to the management through the Chief Executive Officer. The board
supervises management in the execution of the approved strategic plan and evaluates
43
the performance of management in the context of the goals and time frame outlined
in the plan. In this line, board hires, evaluates and perhaps even fires top
management, with the position of CEO. The directors do vote on major decisions
related to financial proposals, offer expert advice to management and make sure the
firm’s activities and financial condition are accurately reported to its shareholders.
As regards the role management development, the board is concerned with
supervising the selection, evaluation and compensation of the senior management
team. This includes succession planning for the CEO. In the transition from a small,
growing entrepreneurial organization to becoming an established institution,
governance ensures that the company survives. Governance moves an institution
beyond dependency on the visionary.
In executing all its responsibilities, the board provides an important corporate
governance function. Because the board is a part of the firm’s organizational
structure at the top of the corporate hierarchy it might be considered the firm’s most
important internal monitor. While the board’s role in the corporation seems to ensure
that shareholders interests are being attended to, there are some potentially serious
problems. Among the issues are a lack of board independence from the CEO,
directors who do not have the time or expertise to fulfil their roles adequately and
members who do not have a vested interest in the firm. In other words there is an
agency problem where the directors do not always act in the shareholders’ best
interest.
44
As regards the loyalty and fair dealing role, the board of directors has to put the
interests of shareholders first comparing to their own individual interests. In addition,
directors must act with care by doing what an ordinary prudent person would do
under the same position and circumstances. A great deal of important board work
occurs at subcommittee level and subsequently goes to the full board for approval.
The reason for delegating responsibilities to committees is that it is more efficient
and effective to allow for specialization of tasks on the board instead of bringing all
actions to the full board. Kim et al., (2010) name three most common board
subcommittees.
The first subcommittee is the audit committee which is in charge of reviewing
internal and external auditing. It has to ensure that the auditors do their jobs
effectively and efficiently. The second is the compensation committee which is
responsible for setting and designing the executive incentives (compensation
package). The third one is the nomination committee which searches for and
nominates candidates to run for vacancies among seats on the board of directors and
at the level of employees.
The board of directors is the prime internal control mechanism responsible for
monitoring the actions of top management. To do it in an effective way, the board of
directors has to have two characteristics namely; board size and board independence.
2.8.6 Board size
With respect to size, generally small sized boards are more effective than big sized
boards as pointed out by Kim et al. (2010) and Berg and Smith (1978) and Barnhart
45
and Roseinstein (1998). This is because they can hold more candid discussions and
make quicker decisions and because they are less easily controlled by management
than is a large one. There is no universal rule for what should be the best number of
members of the board, (Dalton and Dalton, 2005).
In South Africa, the most frequently occurring board size is four. In Ghana and
Kenya, the number is seven; while in Ivory Cost and Zambia, the number is eight. In
some other African countries, the number varies; Mauritius (9 to 10), in Namibia (11
to 12), and in Rwanda, the smallest board is made of five members. Rwanda in its
Microfinance policy and guidance documents (2005) suggests that the board size
does not eceed eleven members. This does not mean that these are fixed numbers;
you may find more members or fewer members.
Literature points out that a board of directors of more than seven members is easily
controlled by the management of the company and consequently it becomes less
effective in achieving its roles, (Roselina, 2007). This board is called a big sized
board and the one of less than seven members is a small board of directors. When the
boards get to be too big, agency problems increase and the board becomes symbolic.
In contrast, others believe that larger boards may be more valuable because of the
greater diversity of knowledge and experience available.
2.8.7 Board composition
With respect to board composition, the outsider/insiders members’ proportion is very
critical, (Dalton and Dalton, 2005). The insider members are referred to as the firm’s
management or who are affiliated with managers while the outsider members are
46
those of non-relationship with the management of the corporation and having
specific expertise for the development of the company. The insider members tend to
be less effective than outsider members as monitors of management.
Fama and Jensen emphasize that independent directors (outsiders) tend to have more
incentives to build reputations as expert monitors. One has to realize however that, to
a director, a reputation as one who does not make trouble for CEOs is potentially
valuable as well (Dalton and Dalton, 2005; Daily and Dalton, 1992). The afore
mentioned does not mean that all members should be outsiders. A reasonable number
of inside directors on the board can add value too. If a board contains a mix of inside
and independent (outside), a whole range of skills and knowledge is brought in.
Inside directors can add value because they are well informed about the company,
whereas outside directors will act more quickly than inside directors if something
goes wrong; but they may do wrong thing if their deliberations are not based on the
information availed by inside directors (Roselina, 2007; Denis and Connel, 2003). A
high number of outsiders’ board members compared to the insiders’ board members
may tend to increase the level of independence of the board of directors as far as the
monitoring of the CEO is concerned for the sake of performance of the MFIs.
Another perspective on board independence is provided by Hermalin and Weisbach
(1991). They argued that a board’s independence is the result of a bargaining game
between the board and the CEO. The CEO prefers a less independent board while the
board prefers to maintain its independence. If CEO demonstrates high skills by
exceptionally performing well, the board’s independence declines. In case of a poor
47
corporate performance, the independence of the board increases and the CEO is
perceived as someone to be replaced.
2.8.8 Separation of Chairmanship of the board and CEO
Best practice codes on corporate governance recommend, among other things, that
boards include a number of outside directors and that the positions of Chair and CEO
be held by different individuals (Dalton and Dalton, 2005). Jensen (1993) points out
that when the CEO also holds the position of the chairperson of the board, internal
control system fails, as the board cannot effectively perform its key functions
including those of evaluating and firing CEOs. Similarly, Fama and Jensen (1983)
argued that concentration of decision management and decision control in one person
reduces a board’s effectiveness in monitoring top management.
Empirically, there is more evidence that firms perform better when the CEO and the
chairperson functions are separated, (Marcio et al., 2011). In the same way, Goyal
and Park point out that the sensitivity of top executive turnover to corporate
performance is significantly lower for firms that vest the titles of CEO and
chairperson in the same individual.
2.8.9 Supervision
Accountants and auditors are an important part of corporate monitoring system. The
accountant keeps track of the quantitative financial information of the firm. Because
mistakes and other problems, such as intentional fraud, may occur with accounting,
there are auditors who review the financial information, (Mersland, 2008). As such,
auditors may be in the best position to monitor the firm. In this process, auditors
48
obtain private information about the company that others can not obtain. They use
this information to determine whether the company’s public financial statements
reflect the true level of business being conducted. Financial providers and investors
rely on these statements to get an accurate picture of the firm’s business activities
and financial health. Therefore, the auditors’ evaluation is very crucial.
2.8.9.1 Accounting functions
Historically, accounting has been the function of gathering, compiling, reporting, and
archiving a firm’s business activities. This accounting information helps individuals
in many roles who depend on it to make decisions. For convenience, those who need
accounting information are categorized as either insiders or outsiders of the firm
(Kim et al., 2010). Management accounting is the development of information for
insiders, such as company managers. Managers use these pieces of information to
measure the progress toward their goals and highlight any potential problem in
advance (Joanna, 2010). For example, managers want to know which products have
the best sales and which are selling poorly. They want to know which products tend
to sell together, or how is inventory or cash being managed. Managers want to get an
insight about cash to pay the company’s upcoming debts payments.
Accountants answer to these questions with budgets, variance reports, sensitivity
analysis, revenue reports, costs projections, and even analysis of competitors
(Jansson et al., 2004). When firms consider how to expand products or services,
managerial accountants help formulate profit projections from revenue and cost
projections. In short, managerial accounting has been, historically, and is still playing
a large part in the control and evaluation of the business and its performance.
49
Outsiders of the firm also use accounting information for their own purposes.
Investors, banks, the government, and other stakeholders have a keen interest in the
financial health of the firm. Banks and other creditors want to know it the company
will be able to pay back its debts. Shareholders want to know how profitable the firm
is currently and how profitable the firm will be in the future (Kim et al., 2010).
Employees might have a double interest because their have their careers and
employment at one hand and they might be investors through their retirement plans
at another hand.
Financial accounting provides information for outsiders. Whereas managerial
accounting reports may break down performance for managers by individual
products or regions/provinces of the country, financial accounting reports summarize
the business as a whole, although they can be broken into business segments and
regions or provinces.
The three main financial statements, namely: the statement of income (income
statement), the statement of the financial position (balance sheet), and the statement
of cash flow and other important pieces of information are used by outsiders to
determine the firm’s value, profits, and its risk. Outsiders want to be able to compare
firms easily. That is why there is a requirement that these accounting statements
adhere to the uniform set of international standards known as “Generally Accepted
Accounting Principles (GAAP)”. These statements are prepared by the accountants
of the firm and reviewed by independent accountants from an auditing company. In
order to assure the outsiders about the accuracy of the accounting data, you need to
make an accounting analysis. This analysis follows these steps: Identify Key
50
Accounting Policies, Assess Accounting Flexibility, Evaluate Accounting Strategy,
Identify Red Flags. Analysts must look for red flags that point to questionable
reporting quality. Indicators of these red flags may be unexplained changes in
accounting policies especially when performance is poor, unexplained transactions
that boost profits, unusual increase in receivables in relationship to sales, unusual
increases in inventories in relationship to sales, increasing gap between reported
profits and operating cash flow, increasing gap between net income and taxable
income, unexpected large assets write-off, and qualified auditor’s opinion.
The analyst must move to correct the numbers if the analysis shows distortions. For
that, he/she may use the cash flow statement for the problem of accrual accounting
and possible capitalization of expenses. He may also use the footnotes to find out the
changes in accounting polices, details of reserves, and differences with taxable
profits.
Sometimes accounting methods and business record-keeping can be very different
for reports to managers for various reasons. For example, when reporting business
activities in an annual report, choices might be made that maximize earnings in order
to make them appear stronger than they would otherwise be, in the hope of driving
up the firm’s stock price. Whereas, the Internal Revenue Service (IRS) forms, for tax
payment, are being completed, choices might be made to minimize earnings in order
to minimize tax expenditures.
There are other potential problems due to the kind of record-keeping used by
accountants. Some may occur as unintentional errors, sometimes these errors are due
51
to miscalculations or due to applying an expense to the wrong accounting ledger
(Kim et al., 2010). Another potential problem occurs when judgments are required.
For example, should the firms count all receivables when they know that some
clients might never pay for goods or services rendered? Finally, accountants could
perpetuate fraud; they could overstate income, or understate liabilities, or overstate
assets such as receivables. Or they could be tricked by one of the managers to
commit fraud on his or her behalf. Accounting fraud is probably the largest potential
problem with accounting.
Because of these accounting potential problems, due to recording-keeping, which
bring in ambiguity or confusion to accounting information users, there is a need of
auditors’ reports. To avoid all the problems related to accounting and auditing; we
have the Generally Accepted Accounting Principles (GAAP). The raison d’être of
this GAAP is first because it is difficult for investors to determine whether the
accounting reports are displaying reality, accounting standards and rules have been
developed.
Secondly, Generally Accepted Accounting Principles and International Standards set
the principles and rules for treating many of the accounting issues regarding the
determination of financial reports.
The third reason is that they are designed to reduce management flexibility and
possibility of manipulation of financial reports over time and across different
industries and firms.
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2.8.9.2 Auditing
Mid-2002, in response to the familiar financial disaster, the Sarbanes-Oxley Act and
other new exchange listing proposals were passed to help restore investor
confidence. The section 404 of the Sarbanes-Oxley Act requires that management
assesses the internal controls in the corporation, and issues an internal control report
as Kim et al., (2010); and Kumar (2010) and Mallin (2010) say. Another new
requirement was that listed companies have an effective internal audit function. In
addition, the Sarbanes-Oxley Act of 2002 stops the external auditor from taking up
some outsourcing activities, including internal audit services.
2.8.9.3 Internal control and risk management
The importance of internal control processes is emphasized by the exposure draft on
Enterprise Risk Management issued in 2003 by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) Mallin (2010). This draft
builds on the 1992 COSO report on internal control and provides guidance on sound
control and risk management practices. The 2003 COSO report on enterprise risk
management builds on the 1992 guidelines on internal control and defines enterprise
risk management as Kim et al., (2010) as follows:
“… A process, affected by an entity’s board of directors, management and other
personnel, applied in strategy setting and across in the enterprise, designed to
identify potential events that may affect the entity, and manage risks to be within its
capacity, to provide reasonable assurance regarding the achievement of the entity
objectives”.
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There are four objectives related to the internal control (Mallin, 2010). The first
objective is related to the understanding of the extent at which the entity’s strategic
objectives are being achieved. The second objective is to understand the extent at
which the entity’s operating objectives are being achieved. The third objective is to
determine that the entity’s reporting is reliable; and the fourth objective is to
determine that applicable laws and regulations are being complied with.
Internal control and risk management include all measures and practices that are used
to mitigate exposures to risks that could potentially prevent a corporate from
achieving its objectives (Mallin, 2010). It also serves as the first line of defence in
safeguarding assets, in preventing and detecting errors and fraud. Internal control is
not solely a procedure or policy that is performed at a certain point in time. It is an
ongoing process operating at multiple levels within an organization. The COSO
framework of 2003 identified and described the components necessary for effective
risk management, which are internal environment, objective setting, event
identification, risk assessment, risk response, control activities, information and
communication and monitoring (Kim et al., 2010).
2.8.9.4 Internal auditing
The recent corporate governance best practice codes very explicitly recommend the
installation of an internal audit function in companies. Identifying and implementing
best practices is a journey, not a destination (Mallin, 2010). Internal auditing is an
independent, objective assurance and consulting activity designed to improve an
organization’s operations and, thus, to add value. It helps an organization to
accomplish its objectives by bringing a systematic, disciplined approach to evaluate
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and improve the effectiveness of risk-management, control, and governance
processes.
One of the objectives of the internal audit is to provide assurance that the risk
management processes are functioning as intended. Through specific
recommendations and other consulting services, the internal audit function
furthermore assists management and the board by improving risk management and
control processes. Internal auditors should be, or become, very familiar with an
organization’s value creation, as they accumulate knowledge about the organization
throughout their careers. They can therefore be ideal consultants for the improvement
of an organization’s processes. The improvement of the internal audit is likely to
have a positive effect on customers or clients and suppliers. Thus, the internal audit
function is also able to add value to external parties or stakeholders.
In short, an internal auditor may increase the effectiveness of an entity’ control
environment and can assume an important role as an in-house advisory function that
offers analysis and assurance to the board as to the functioning of the risk
management and internal control systems (Mallin, 2010; Kumar, 2010). The internal
audit has become a major support function for management, the audit committee, the
board of directors, the external auditors and other key stakeholders and it can play a
key role in promoting and supporting effective organizational governance.
Many firms have internal auditors, their responsibility being to oversee the financial
and operating procedures, to check the accuracy of the financial record-keeping, to
implement improvements with internal control, to ensure compliance with
55
accounting regulations, and to detect fraud. In fact, the people who initially detected
financial fraud at WorldCom were the company’s own internal auditors.
However, tensions might exist because the internal audit team is asked to serve two
masters: the management and the board or the board’s audit committee. Management
wants the internal auditor to provide both assurance and consulting based on broad
operational skills that address risks, evaluate the efficiency of operations, and
stimulate organizational action. On the other hand, the board or its audit committee is
more interested in assurance regarding controls. To avoid or to reduce such tensions,
board of directors hires external auditors for an overview of the entire corporation.
2.8.9.5 External audit
External audit services are demanded as monitoring devices that reduce information
asymmetries and agency costs between the company’s managers and stakeholders by
allowing a third (outside) party to verify the validity of financial statements (Mallin,
2010; Kim et al., 2010). More specifically, one of the purposes of the external audit
function is to assure the timeliness and accuracy of the reporting of relevant
information to shareholders this assurance is needed because users of financial
statements do not have the opportunity or time to verify whether the statements
actually reflect underlying business transactions.
Generally external and internal auditors use similar documentation and share a
general customer focus (Kim et al., 2010). The key differences in the two professions
stem from the basic reason for obtaining the services. For external auditors, the
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demand for certification of financial information originates from outside
shareholders or from an external regulator. In contrast, the internal auditors are
driven by the desire of management to monitor the internal processes that should
ensure accuracy, efficiency, and effectiveness of operations.
Often external auditors assess the system and procedures used by internal auditors to
see it they can rely on the internally generated reports when conducting their own
audit. To conduct their external audit, the auditors might conduct interviews with the
firm’s employees to assess the quality of the internal audit system, make their own
observations on the firm’s assets such as inventory levels, confirm with the firm’s
customers and clients to check the accuracy of short term assets and liabilities, and
conduct their own financial statement analysis such as comparing firm’s financial
ratios from one period to the next or to the preceding one.
Because external auditors are supposed to be independent from the firm being
audited and because their explicit job is to check for financial misstatement and
adherence to GAAP, it is they who must ensure the accuracy of the firm’s financial
information for shareholders. The conditional probability of reporting a discovered
abnormality depends on the auditor’s independence from a given client or from the
one concerned by the abnormality. Among roles of external auditing we can cite the
following: external auditors are needed for the verification of the accounting data and
asserting its integrity; external auditing ensures that management is using the
appropriate principles and rules in the presentation, and external auditing improves
the quality and creditability of the data, the objective of accounting data analysis by
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the external auditor is to capture the bias in accounting data and undo them. These
may result from the rigidity of the accounting rules, forecasting errors by
management, and/or managerial incentives and choice.
2.10 MFIs’ Responsibility and Citizenship
The modern evolution of the stakeholder view of the firm advocates that
management develops specific relationship with stakeholder groups. Those who
spouse this idea argue that companies have social obligations to operate in ethically,
socially, and environmentally responsible ways (Kim et al, 2010). This active
approach is referred to as corporate social responsibility or even corporate
citizenship. Corporate responsibility is a term that is supplanting the term corporate
social responsibility. The term social is increasingly omitted in order to emphasize
the broader responsibilities of business corporations, particularly their
responsibilities with regard to the environment. Corporate governance is a term with
longevity, which has gained greater prominence since early 1990s. The issues of
whether corporations can assume the status of citizens, if so, whether such
development is desirable.
2.10.1 MFIs’ social responsibility
The term corporate social responsibility (CSR) today is one of the most widely used
concepts in business (Vogel, 2005; Enquist et al., 2008). CSR was first used and
defined by Bowen (1953), but the debate over the responsibilities of business for
ecology (environment), and its relationships with the society has continued. There is
still no consensus on a definition of CSR Kumar (2010) and Mallin (2010) try to
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explain the dilemma by cataloguing the terminology and ideas. This wide debate
raises the questions regarding both the role of business and the significance of
companies’ internal structures and contents to the general population (Mallin, 2010).
Kim et al. (2010) proposed the following broad definition of CSR: … an umbrella
term for a variety of theories and practices, all of which recognize the following:
(a) That companies have a responsibility for their impact on society and the
natural environment, sometimes beyond legal compliance and 11 the liability
of individuals;
(b) That companies have a responsibility for the behavior of others with whom
they do business (e.g. within supply chains), and that
(c) Business needs to manage its relationship with wider society, whether for
reasons of commercial viability, or to add value to society.
This above definition is broad and integrates different views of CSR. It is mainly
defined as concepts and strategies by which companies voluntarily integrate social
and environmental concerns into their business operations and stakeholder
interactions (Fischer & Lovel, 2009). In other words, CSR is the concept that an
organization is accountable for its impact on all relevant stakeholders.
2.10.2 MFI’s citizenry
The term citizen normally relates to the relationship between an individual and the
political state in which the individual lives (Kim et al., 2010). The term citizen
carries with it notions of rights and responsibilities on the part of the individual and
the state. However, this reciprocity, two ways relationship, is unlikely to be equal
59
one. Within democratic theories of the state, citizens have ultimate sovereignty over
the state, or at least sovereignty over those who represent the citizenry within
government. Practice, however, usually reflects a quite different balance of power.
Being described as a citizen does not of itself imply much about morality (CSFI,
2008). One important debate distinguishes the concept of citizenship-as-legal-status
from the concept of citizen-as-desirable-activity. The minimum requirements to be
called a citizen are very different from the requirements to be called a good citizen.
The desire to encourage corporations to assume greater responsibility for their
actions can be traced back over many decades, and reflects growing concerns
regarding the power and influence of corporations over people’s lives and even the
independence and integrity of governments. As the power and influence of business
corporations have assumed ever greater proportions, so calls for mechanisms to be
put in place that would make corporations more accountable as well as responsible to
a wider constituency than merely their shareholders. Within this latter aspect of the
debate, the use of the term stakeholder has gained an important place in corporation
domains in recent years.
The development of the argument from one of requiring corporations to act in
socially responsible ways, to more recent calls for corporations to be seen as
corporate citizens, reflects a desire to lock corporations, both formally and possibly
legally, into the responsibility that this status would confer. As indicated in the
definition below, the citizenry is, in theory, sovereign to the state, yet the citizenry
has little or no access, and certainly few, if any, rights with respect to corporations.
With corporations playing an increasingly influential role over many aspects of
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social and political life, the demand for more accountability and responsibility on the
part of corporations is unlikely to diminish.
2.10.3 Role of MFIs as citizen
The role of a citizen can vary from the active notion of citizenship evident in the
ancient Greece to a passive acceptance of governance from a sovereign body or from
the bureaucratic state (Brickley and James, 1987). Within the corporate citizen
debate, the demands made by corporations vary a minimalistic societal neutral
influence to a proactive role. The societal neutral arguments do not, however, reflect
a status-quo situation, or even a single understanding of what might be meant by
societally neutral; being societal neutral means that; negative and positive effects of
corporate activities could be balanced out, possibly involving an international
perspective, or would a corporation’s impacts need to harm no one or nothing at any
time (Byrd and Hickman, 1992). It means also acting within legal constraints would
be acceptable, even if the law was judged by many to be inadequate. Finally, it
means that there is a general acceptance that corporations do have social
responsibilities.
These debates are still developing and represent just some of the issues that make the
general area of business and values both dynamic and vital. The corporate’s
responsibilities (CSFI, 2008) can be seen in the way that the company should
conduct its business in a manner that meets its economic, legal, ethical, and
philanthropy expectations: The following are levels of CSR:
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Level 1: Economic; the first and foremost social responsibility of a firm is economic.
The firm must survive by producing goods and or services needed by the society
leading to both profit and benefit.
Level 2: Legal; the society expects firms to operate their business within the legal
framework for itself and the surroundings.
Level 3: Ethical; these responsibilities are those over and above the ones codified in
laws and are in line with societal norms and customs. They are expected, though not
required, by society even though they may be ill defined. This could include things
such as environmental ethics.
Level 4: Philanthropy; corporate giving is discretionary, although increasingly
desired by stakeholder communities.
The economic responsibilities have the highest priority. A firm must be efficient and
effective in order to survive over the long term and then be useful to the wide
society. However, it must execute its business activities in a legal and ethical ways.
Philanthropy is the least important priority in corporate responsibility or citizenship.
While corporate citizenship might include charity or philanthropy, the concept
focuses more on engagement with stakeholders to achieve mutual goals (Kim et al.,
2010). Proponents of CSR argue that the main drivers of the citizenship trend include
the following; globalization, the worldwide expansion of business and market
economies; greater power of global firms should fulfil the activities left to
governments, an increasingly popular environmental movement and a rising desire in
the capital markets to punish firms not meeting ethical standards.
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Some organizations have responded to this trend by including CSR orientted
statements in their corporate values and goals. For example, the ULK’s key values
are Integrity, Humility, Determination, and Excellence. These statements recognize
that CSR has value in a code of conduct or ethics, a commitment to local
communities, an interest in employee health and education, an environment
consciousness, and recognition of social issues; we can refer to the ULK’s Motto and
its philosophy to understand how companies are concerned by these issues of
corporate citizenship and fairness in their working environment and their
surrounding one.
2.11 Review of the Empirical Studies
2.11.1 Researches on Microfinance
Microfinance is the supply of financial services to micro enterprises and poor
families (Robinson, 2001); this author considered rural area as the environment of
study and used a survey to analyze the performance of micro enterprises basing on
how board composition may help in changing the lives of poor, the study used a
survey. The findings were that micro enterprises changed the lives of poor but
suggested a further study considering various areas. Ledgerwood (1999) linking the
performance of MFIs to the board composition; this study ended by saying that there
was no link between the board composition and the performance of MFIs. The two
studies concentrated on developed countries. Given that the environment may differ
from a developed to developing countries as far as the level of poverty, the studies
cannot be replicated to other environments. Schreiner (2002) in his study on
microfinance with the small producers, focused on Brazilian environment which is
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somehow similar to the first one; this study used a questionnaire to analyze the
influence of board size to the performance of MFIs; the findings were balanced
saying that board size when small may influence the performance and when big may
negatively affect the performance of MFIs. Mersland (2008) in his study corporate
governance and ownership in MFIs used also a survey to collect data and analyzed
using the chi square test, he was looking at the ownership structure; this touches the
issues of board composition and supervision of the MFIs. He concluded that the
ownership may influence the performance of MFIs. All of these studies concluded
that microfinance is a supply of financial services to poor families. This shows that
there is a need to replicate this kind of studies to other environments such in Africa,
especially in Rwanda. The U.N. year of Microcredit in 2005 and the Nobel Peace
Prize awarded to Mohammad Yunus and Grameen Bank in 2006 have given
considerable recognition worldwide to microfinance institutions as development
tools (Mersland, 2008). Therefore, microfinance has become an investment
opportunity offering investors a new asset for their portfolio (Reille and Foster
2008).
For the delivery of microfinance services, a new type of microfinance institution
(MFI) has come into being. A typical characteristic of MFIs is that they have a dual
mission, as pointed out earlier, of serving the poor and insuring their own
sustainability (Helm, 2006); in its study, access for all: building inclusive financial
systems, again the work was conducted in a developed country like USA, whereby
the people living under the poverty line are few whereas in Africa those of under the
poverty line are the ones concerned with the MFIs services (Mersland, 2008); these
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studies recommended similar studies in poor countries, to see the level of outreach of
MFIs which has grown tremendously during the last couple of decades. Christen
(2004) produced a paper in Washington on the financial institutions with a double
bottom line: Implications for the future of microfinance; in this paper the author
points out how microfinance will boost the poor in terms of socio economic living
conditions and recommend that this should be assessed in rural and poor regions. He
further in his paper reported an astonishing 500 million people served, mostly with
savings accounts, while the microcredit summit, in the 2006 meeting in Halifax,
Canada, celebrated the milistone of 100 million borrowers reached by microfinance
institutions.
Nevertheless, microfinance reaches a fraction of the world’s poor population as said
by Robinson (2001), Christen (2004) and Mersland (2008). Additionally, there is a
special challenge related to reaching poorer segments and people living in less
densely populated areas (Helms, 2006; Johnson, 2006). Above all, there is a
recognized supply challenge in the market, which indicates that there is a need for
more knowledge about factors that may influence the performance of MFIs. The
intent of this research is to fill part of this gap by studying how different governance
mechanisms correlate to the performance of MFIs in Rwanda.
Scholars from a broad spectrum of research traditions have found interest in
microfinance research. Mersland (2008) identified one hundred thirty peer reviewed
articles published between January 2002 and September 2004. The articles were
found in thirty nine different journals from a wide variety of traditions and schools.
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Among all those articles, thirty two had only one article related to microfinance.
Approximately five out of six articles were in multidisciplinary development journals
or in one of the two specialized practitioner oriented journals, Small Entreprise
Development and Microfinance and journal of Microfinance. One out of ten articles
was found in economics, finance, or business management journals. This shows how
the development aspects of microfinance attract the interest from researchers.
In particular, the change of living conditions from the access to the microfinance
institutions, the building of inclusive financial sectors, aspects of group lending and
group collateral, and the development of microfinance theory Littlefield (2003). This
author in his study wanted to know the effectiveness of MFIs in achieving the
Millenium Development Goals and found that MFIs are good tools to reach the
MDGs and recommend strengthening them wherever they are. This shows that the
MFIs attract the attention of researchers, as U.N (2006); Besley (1995) and aghion
(2005) illustrated the motivation of researchers to the MFIs’ industry. Additionally,
the widespread tradition of informal savings and lending schemes often referred to as
Rotating Savings and Credit Associations as said Ambec (2007); Bouman (1995),
has also attracted great interest from scholars.
It is in this stream of research, the study of the performance of MFIs in Rwanda that
the researcher brings in new knowledge by bringing questions, theories on how
corporate governance mechanisms correlate to the performance of MFIs. Investing in
corporate is a risky business and any investor must recognize and accept this fact.
The failures of corporations through all economic crises have shown around the
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world, accounting mechanisms, auditing and other corporate mechanisms were
questioned, these failures brought in the developments in the corporate governance
domain.
There have been a lot of activities with regard to corporate governance in the UK
since the early 1990s as Fischer and Lovell (2009) point out. In addition to those
aspects, in USA there was one notable reform that of the Sarbanes–Oxley Act in
2002 as the authors (Fischer and Lovell, 2009) said. A brief overview of these
developments Fischer and Lovell (2009) is provided so that the contestability of
corporate responsibility and corporate governance can be discussed.
2.11.2 Corporate governance and corporate performance studies
Previous empirical studies have provided the nexus between corporate governance
and firm performance (Gopers, 2003; Black et al, 2003 and Sanda et al, 2003) with
inclusive results. Others, Bebchuk and Cohen (2004) have shown that well governed
firms have higher performance. The main characteristic of corporate governance
identified in these studies include board size, board composition, and whether the
CEO is also the board chairman. There is a view that a larger board is better for
corporate they have a range of expertise to help make better decision, and are harder
for a powerful CEO to dominate. However recent thinking has leaned towards
smaller boards. Empirical research supports this, for example Yermack (1996)
documents that for large US industrial corporations, the market values firms with
smaller boards more highly. Eisenberg et al. (1998) also find negative correlation
between board size and profitability when using sample of small and midsize of
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Finnish firms. In Ghana it has been identified that small board sizes enhance the
performance of MFIs, Kyereboah-Coleman and biekpe (2005). Mark and Yuanto
(2003) echo the above findings in firms listed in Singapore and Malaysia when they
found that firm valuation is highest when board has five directors, a number
considered relatively small in those markets. In a Nigerian study, Sanda et al (2003)
found that, firm performance is positively related with small, as opposed to large
boards.
On the issue on whether directors should be employees of or affiliated with the firm
(insiders) or outsiders has been well researched, yet no clear conclusion is reached.
On the one hand, inside directors are more familiar with the firm’s activities and they
can act as monitors to top management if they perceive the opportunity to advance
into positions held by incompetent executives. On the other hand, outside directors
may act as professional referees to ensure that competition among insiders stimulates
actions consistent with shareholder value maximisation (Fama, 1980; John and
Senbet, 1998), argue that boards of directors are more independent as the proportion
of their outside directors increases. Though, it is been argued that the effectiveness of
a board depends on the optimal mix of inside and outside directors, there is very little
theory on the determinants of an optimal board composition (Hermalin & Weisbach,
2002).
Most of the studies on the corporate governance and corporate performance try to
find out if there is a link between corporate governance and corporate performance.
Whilst there have been many studies carried out to determine whether there is a link
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between corporate governance and corporate performance, the evidence appears to
be mixed (Millan, 2010).
One of the earliest and much quoted studies is that of Nesbitt (1994). This author
reported positive long-term stock price returns to firms targeted by CalPERS, later,
the same author found similar findings. Subsequently, Millstein and MacAvory
(1998) studied 154 large publicly traded US corporations over a five year period and
found that corporations with active and independent boards appear to have
performed much better in 1990s than those with passive, non independent boards.
However the work of Dalton, Daily, Ellstrand and Johnson (1998) showed that
boards’ composition had virtually no effect on firm performance, and that there was
no relationship between leadership structure, CEO/Chairperson, and firm
performance. Patterson (2000), of the conference board, produced a comprehensive
review of the literature relating to the link between corporate governance and
performance and stated that the survey did not present conclusive evidence of such a
link. Whilst the evidence seems to be quite mixed, there does appear to be a widely
held perception that corporate governance can make a difference to the bottom line.
The findings of a survey by McKinsey (2002) found that the majority of investors
would be prepared to pay a premium to invest in a company with good corporate
governance. The survey states that good governance in relation to board practices
includes a majority of outside directors who are truly independent, significant
director stock ownership and stock based compensation, formal director evaluations,
and good responsiveness to shareholders requests for governance information. The
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findings indicate that investors would be prepared to pay 11 per cent more for the
shares of a well governed Canadian company, 12 per cent more for the shares of a
well governed UK company, 14 per cent more for the shares of a well governed US
company, compared to shares of a company with similar financial performance but
poorer governance practices. The premiums rise to 16 per cent for a well-governed
Italian company, 21 per cent for a Japanese company, 24 per cent for a Brazillian
company, 38 per cent for a Russian company and, at the top of scale with the highest
premium for good governance, 41 per cent for a well-governed Moroccan company.
It is therefore the investor’s perception and belief that corporate governance is
important and that belief leads to the willingness to pay a premium for good
corporate governance.
Some of the significant papers in recent years that have found evidence of a positive
link include Gompers et al. (2003) and Deutsche Bank (2004a and 2004b). Gompers
et al., examined the ways in which shareholder rights vary across firms. They
constructed a governance index to proxy for the level of shareholder rights in
approximately 1500 large firms during the 1990s. They found that firms with
stronger shareholder rights had higher firm value, higher profitability, higher sales
growth, lower capital expenditures, and made fewer corporate acquisitions. Deutsche
Bank (2004a and 2004b) explored the implications of corporate governance for
portfolio management and concluded that corporate governance stands are important
component of equity risk. Its analysis also showed that for South Africa, Eastern
Europe, and the Middle East, the performance differential favours those companies
with stronger corporate governance.
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Hermes (2005) provided a succinct summary of academic and practitioner research
in this area and concluded by stating that a number of the authors of the various
studies cited in the review have mentioned that there is further empirical work
needed on the issue of relationship between corporate governance and performance.
In sum, the evidence, both academic and practitioner, points on balance towards the
view that good governance helps to realize value and to create competitive
advantage. This is more an intuitive feeling because the studies are trying to single
out corporate governance variables that may affect performance and this is very
difficult to do so. However, shareholder activism is a key to ensure good corporate
governance, and without this, there is less accountability and transparency, and hence
more opportunity for management to engage in activities that may have a negative
effect on the bottom line.
The global financial crisis has lighted the importance of corporate governance in
restoring trust in global capital markets. The ICGN issued two statements on the
global financial crisis, one in late 2008 and another in March, 2009. The latter
statement pointed out that institutional shareholders must recognize their
responsibility to generate long term value on behalf of their beneficiaries, the savers
and pensioners for whom they are ultimately working, and shareholders should take
governance factors into account and consider the riskiness of a company’s business
model as part of their investment decision-making. Governance should not be a
parallel activity. It needs to be integrated into investment. Furthermore in its
conclusions, the ICGN (2009) statement emphasizes securing company and investors
will increasingly take into account companies’ governance profiles in investment
decisions.
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2.12 Research Gap
This study aims at another step in the debate on the performance of Microfinance
Institutions, as influenced by governance. The study covers the gaps in the study of
Luzzi and Weber (2006) in terms of variables used to measure the performance of
Microfinance Institutions. The study bases also on the Youssoufou (2002)’s
recommendations of measuring the performance of Microfinance Institutions using
also their impact on the living conditions of their clients.
From the literature and the empirical studies reviewed, none measured the
performance of MFIs combining its three variables to reach the critical Microfinance
Triangle as Kereta said (2007). Those variables are impact, outreach and
sustainability of performance evaluation of microfinance institutions. Here, Kereta
(2007) said that to assess the performance of MFIs, one has to analyse its outreach to
the poor, its sustainability and its welfare impact on living conditions of MFIs’
customers.
In addition, from the studies reviewed many have studied the link between corporate
governance and the performance of various industries but few have focused their
studies on MFI industry. The little studies which concetrated on MFIs; they did not
show the linkage of the variables of corporate governance to the triangle variables of
the performance of MFIs. Thus, we respond to the Hartarska (2005) in his study,
Governance and performance of Microfinance institutions in central and eastern
Europe and the newly independent states, requests for more studies and more
importantly - better data to analyse corporate governance in the microfinance
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industry. No study before this explores governance and performance on such a broad
level. This study contributes more knowledge on the relationship between the
corporate governance and the performance of MFIs.
2.13 Theoretical Framework
When one analyses the performance of Microfinance Institutions, one may ask what
influences the performance of these institutions. Among many variables, authors
have agreed that governance has a dominant correlation with the performance of
Microfinance Institutions (Helms, 2006; Johnson et al., 2006; Roch et al., 1998;
Labie, 2001; Otero and Chu, 2002).
The concept of governance is split into internal and external aspects as Rock, et al.,
(1998). The same authors define internal governance as a process by which a board
of directors, through management, guides an institution in fulfilling its corporate
mission and protect the institution’s assets. Effective governance occurs when a
board provides proper guidance to management regarding the strategic direction for
the institution, and oversees management’s efforts to move in this direction. This is
essential because the performance of the institution depends on it. The board receives
its authority for internal control from stockholders of corporations, and its job is to
hire, fire, compensate, and advise top management on behalf of those shareholders
(Jensen, 1993) cited by Willekens and Sercu, 2005). The authors further argue that
two characteristics of the board of directors stand out in the empirical literature as
being the greatest interest for effective governance which allows achieving the
performance of any organization; the board size and the independence of the board
members.
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Boards are very important in Microfinance institutions Hartarska (2004) because of
the relative limited role of external market forces. The board of directors is a
governance mechanism that helps to resolve the agency problems between owners
and managers. Board members are elected by shareholders to monitor and advice
managers on behalf of owners. Their efficacy is influenced by many things but the
most important are board size and board independence. Board size refers to the
number of board members. The degree of alignment of board composition and
shareholders’ objectives is measured in the empirical corporate governance literature
by the proportion of outsider/independent directors. More independent directors are
expected to act as better monitors and advisors. Empirical studies have found both
positive and negative relationship between the proportion of outside directors and
firm value (Hermalin and Weisbach, 2003; cited in Hartarska, 2004). The board is
better able to monitor the CEO on the behalf of the owners if the board is
independent. In boardroom, the major conflict is between the manager, who has
incentives to capture the board and thus insure his or her job and non-pecuniary
benefits, and the directors (board members) who have incentives to maintain their
independence to monitor, and if necessary, replace the manager (Fama and Jensen,
1983).
Yuwa (2003) noted, in his research, that the separation of ownership and control may
lead to a divergence between the objectives of owners and the ones of the
management. Rock, et al., (1998) adds that although the relationship between the
board and the management of Microfinance Institutions is dynamic, it must be
grounded in a clear understanding of the roles each serves in order to move the
institution forward.
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During the last three decades, the study of corporate governance has become a mojor
area of research (Denis, 2001; Denis and McConnel, 2003; Shleifer and Vishny,
1997; as cited by Mersland, 2008). Adams and Mehran (2003) report systematic
differences between the governance of banking and manufacturing firms. This
indicates that effective governance structures may be industry specific; yet, little
academic governance research is done in the industry of Microfinance as Mersland
(2008) says. According to Otero and Chu, (2002); Jansson (2004), most literature on
the corporate governance in the microfinance industry consists of consultancy reports
and guidelines on how to structure boards and board’s procedures, and warning
against weak governance structures found in cooperatives and non profit
organizations.
A review of different microfinance policies and relevant reports reveals that most
show the strengths of shareholders firms and the weaknesses of non-profit
organizations and often the cooperatives (Hardy, 2003). The conclusion is that a
shareholder firm can perform better, in both outreach and financially than non-profit
organizations; having a consequence on the change of the living conditions of the
customers of those firms. But does the ownership form actually correlate with the
performance of any organization? In the shareholder firms board of directors act as
an agent of the shareholders or owners who act as principle. Considerable attention
has been given to the role of boards in monitoring managers and in removing non-
performing CEOs. Jensen (1993) voices his concern that lack of independent
leadership makes it difficult for boards to respond to failure in top management team.
Fama and Jensen (1983) also argue that concentration of decision management and
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decision control in one individual reduces board’s effectiveness in monitoring top
management. Thus, the literature reveals a board structure typology, the one-tier
system and the two-tier system. In the one-tier system the Chief Executive Officer
(CEO) is also chairperson of the board, whilst the two-tier system has a different
person as board chair and is separate from the CEO. It has been noted though that the
one-tier board structure type leads to leadership facing conflict of interest and agency
problems (Berg &Smith, 1978; Brickley and Coles, 1997) thus giving preference for
the two-tier system. Agency problems tend to be higher when the same person holds
both positions. Yermack (1996) argued that, firms are more valuable when the CEO
and board chair positions are separate. Relating CEO duality more especially to firm
performance, researchers however find mixed evidence. Daily and Dalton (1992)
find no relationship between CEO duality and performance in entrepreneurial firms.
Brickley et al., (1997) show that CEO duality is not associated with inferior
performance. Rechner and Dalton (1991), also report that CEO duality has no
negative impact on the performance of organisations. Goyal and Park (2002)
examine a sample of U.S companies and find that the sensitivity of CEO turnover to
firm performance is lower than companies without CEO duality. Sandra et al.,
(2003) find a positive relationship between firm performance and separating the
functions of the CEO and Chairperson of the board. The board is supposed to be
better aligned if the CEO and chairperson are different, and if the number of board
meetings increases. A CEO-Chairperson duality may be a sign of CEO entrenchment
(Hermalin, 1991); (Weisbach, 1998), that is, that the CEO pursues policies that give
him or her private benefits, although Brickley et al., (1997) did not find that firms
with a CEO-Chairperson split outperformed those with a CEO-Chairperson duality.
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Rock, et al (1998), continues to note that the actors in the external aspects of the
governance of Microfinance Institutions are; providers of capital, regulatory bodies,
and other stakeholders who may make a supervision on the MFIs where they brought
their shares or lend capital.
In the light of the foregoing analysis, it may be stated more generally that different
systems of corporate governance will embody what are considered to be legitimate
lines of accountability by defining the nature of the relationship between the
company and key constituencies. Thus, corporate governance may be thought of as
mechanisms for establishing the nature of ownership and control of organisations
within an economy. In this context, corporate governance mechanisms are economic
and legal institutions that can be altered through the political process Shleifer and
Vishny (1997). Company law, along with other forms of regulation both shape and is
shaped by prevailing systems of corporate governance. The impact of regulation on
corporate governance occurs through its effect on the way in which companies are
owned, the form in which they are controlled and the process by which changes in
ownership and control take place (Jenkinson and Mayer, 1992). Ownership is
established by company law, which defines property rights and income streams of
those with interests in or against the business enterprise (Deakin and Slinger, 1997).
Corporate governance describes how companies ought to be run, directed and
controlled (Adbury Committe, 1992). It is about supervision and holding to account
those who direct and control the management.
As a provider of banking services, the MFI is subject to adverse selection and moral
hazard from credit clients with little or no collateral (Armendariz de Aghion and
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Morduch, 2005). Adverse selection arises since the MFI does not have enough
information to differentiate between good and bad risks. Moral hazard is a problem
that the borrower will not exert necessary efforts to repay the loan, when the
Microfinance institution is unable to monitor the effort. What sets the new
microfinance initiatives apart is that of finding new ways to deal with these
problems, and thereby, to establish workable business models. This adverse selection
and moral hazard on the part of the MFIs should be extended to problems on the part
of depositors and borrowers. How can they judge if the MFI does not use its
informational advantage in the money markets to charge too high loan interest, or to
take on too much risk with depositors’ money?
Thus, adverse selection and moral hazard problems are experienced from both the
MFI and the customers’ viewpoints. Thus, Macey and O’hara (2003) maintain that
the relationships to depositors and borrowers are as important to the success of the
MFI as the managers’ and boards’ relationship to its owners. Therefore, incentive
problems have a dual nature - one between owners and managers, the other between
the MFI and its customers. Furthermore, the special nature of MFIs as providers of
financial services often requires public regulations of the MFIs-customers
relationship in order to avoid economic-wide breakdowns.
Figure 2.5: Theoretical model of the study Source: Drawn by the author
CORPORATE GOVERNANCE
• Board size • Board composition • Supervision
PERFORMANCE OF MFIs
• Impact • Outreach • Sustainability
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Therefore, the monitoring of the MFIs is not as straightforward as in ordinary firms,
and we need to take the MFI’s regulatory framework into consideration in order to
achieve the performance of the MFIs. In addition to this wider set of governance
mechanisms from the agency relationship of owners and managers, we have to
consider regulation as a major component of corporate governance. Successful
governance should alleviate mutual adverse selection and moral hazard problems.
From the developed literature flows the above theoretical model of the study. One of
many variables which influence the performance of microfinance institutions is
governance. As a very wide concept, corporate governance will be studied under the
constructs of board size, board composition and supervision. The performance of
microfinance institutions will be studied under the following measures: impact,
outreach and sustainability.
2.14 Conceptual Framework of the Study
From the theoretical framework, the researcher draws a model which is more
conceptualized showing the direction of the study. Figure 2.6 shows the conceptual
framework.
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Figure 2.6: The conceptual framework of the study
Source: The conceptual framework drawn by the author
There is a need to link the performance of Rwandan Microfinance Institutions
employing the three measures: outreach, sustainability and impact on the citizenry as
suggested by Youssoufou (2002) and identifying governance constructs which may
correlate with the Rwandan Microfinance institutions’ performance. Based on the
summary of the literature, the following theoretical model and conceptual framework
are drawn above. The constructs and measures under which the study will be carried
out are depicted in the above conceptual framework, which draws the study
direction.
Corporate Governance Performance of MFIs
Board Size
Big Size
Small Size
Board Composition
Outside Members
Inside Members
Supervision
External Audit
Internal Audit
Impact
Economic Living Conditions
Social Living Conditions
Outreach
Number of Clients
Number of Loans
Sustainability
Profitability
Debt Recovery
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CHAPTER THREE
3.0 RESEARCH METHODOLOGY
3.1 Introduction
The chapter on research methodology presented all details on how the study was
carried out. It clarified the research design, described the research area, the
population and shown the sampling, and finally presented the measurements or
questionnaire. It pointed out the reliability as well as the validity of the research
instruments. It furthermore showed how data were collected and analyzed. The
researcher structured the chapter for a good understanding of what was presented
under this chapter.
3.2 Research paradigm
This study is under the phenomenology paradigm; phenomenologists are concerned
what things mean, rather than with identifying and measuring phenomena. They are
interested in the idea that human being are source of data, as opposed to the idea that
true research or discovery lies in simply measuring the existence of physical
phenomena (Cooper et al, 2001).
3.3 Research Design
A research design is a plan or blueprint of how the researcher intends to conduct the
research as Babbie and Mouton say (2001). The authors further argue that research
design focuses on what kind of study is being planned and what kind of results are
aimed at. It is a strategy specifying the approach to be used for gathering and
analyzing data. It presents the procedures and techniques for gathering information,
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the population to be studied and methods to be used in processing and analyzing
data. Kothari (2006) defines a research design as an arrangement of conditions for
collection and data analysis in a manner that aims at to combine relevance to
research purpose with economy in procedure.
The author further says that the research design is a conceptual framework within
which the research is conducted. Based on the above definitions, research is an
empirical research with a descriptive research design with correlational approach,
given the types of questions which intend to find out the relationship between the
dependent and the independent variables - the relationship being of correlation. The
researcher used survey methods to gather data to be used for determining and
describing the correlation between the corporate governance and the performance of
MFIs in Rwanda.
Considering the aim of this study, it is obvious that it is of a descriptive research
design with the option of the ex post facto, because of analysing a situation after
some MFIs were closed down by the Government of Rwanda between 2005-2006,
given that the category of the research is to find out the correlation between the
variables under study; these are corporate governance and performance of MFIs. The
researcher used both quantitative and qualitative data because questionnaire and
interviews were used to measure at which extent corporate governance correlates
with the performance of MFIs.
3.3.1 Description of the Research Area
This study was conducted in Rwanda. This country got its political independence in
1962. It is known as the land of thousand hills and it is located in the Eastern side of
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Central Africa. It borders the Democratic Republic of Congo in the west, the
Republic of Uganda in the North, the Republic of Tanzania in the East, and the
Republic of Burundi in the South. Administratively, Rwanda is governed through
thirty districts distributed though out the country in four provinces and the Kigali
City Council.
The total surface area is of 26,338 square kilometres. The small size of this
landlocked makes it an ideal launching pad for regional trade in the field of services.
For many outsiders, the country is known for the 1994 genocide against Tutsis, but
Rwanda has made significant progress in rebuilding itself. As a result, the country is
currently viewed as the most secure place in the region with fast economic growth
and development.
The estimated population of Rwanda is about 10,500,000 of whom 90 per cent live in
the rural areas. Being among few countries of Africa having a common language,
namely: Kinyarwanda (vernacular). In addition to that language, French and English
are the official languages in the country. It is important to note that in 2005, the
Government of Rwanda took the decision to close all the MFIs which were not
performing well.
3.3.2 Population of the study
The definition of the population may be apparent from the management problem or
the research questions but often is not. According to Wikipedidia Encyclopedia
(2011), a population is the entire aggregation of items from which samples can be
drawn. To Mugenda and Mugenda as cited by Cyeze (2009), population comprises
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an entire group of individuals, events or objects having the common observable
characteristics. A population is the total collection of elements about which we wish
to make some references while a population element is the subject on whom the
measurement is being taken Cooper et al., 2001). The population of this study was
made of certified MFIs in Rwanda, the MFIs supervision institution, MFIs customers
and MFIs certified external auditors. The certified MFIs in Rwanda are eighty four;
the MFIs supervision institution being the Central Bank, MFIs certified external
auditors are sixty seven.
3.3.3 Sample and Sampling techniques
From the population, a representative sample was selected. The basic idea of
sampling is that by selecting some of the elements in a population, we may draw
conclusions about the entire population (Cooper et al., 2001). Cooper et al., (2001)
suggested that there are several compelling reasons for sampling, including: low
cost, greater accuracy of results, greater speed of data collection, and availability of
population elements. The ultimate test of a good sample design is how well it
represents the characteristics of the population it represents. In measurement items,
the sample must be valid and it depends on two considerations - accuracy and
precision. Accuracy being the degree to which bias is absent from the sample while
precision being the degree of representativeness of the population. The precision of a
sample is measured by the standard error of estimate - the smaller the standard error
of estimate, the higher is the precision.
There are two main sampling strategies, namely: the probabilistic and the non-
probalistic sampling. The probability sampling including simple random, systematic,
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stratified, cluster and double sampling as classified by Cooper et al., (2001). Each of
these types has its advantages and disadvantages. The types of non-probabilistic
sampling being convenience, purposive (quota and judgement) and snowball as the
above authors classified. For the probabilistic sampling, the simple random sampling
was used to select certified MFIs and MFIs certified external auditors. For the
respondents were selected basing on the non-probabilistic techniques; these are
judgement and quota sampling methods. The first technique was used for the reason
that the researcher selected sample members to conform to some criterion, especially
to those who could hold the right information about the variables to be measured.
The second was selected for all MFIs having the same weigh in order to increase the
representativeness of MFIs in the assessing the correlation between the corporate
governance and the performance of MFIs in Rwanda.
Best and Kahn (1993) as cited by Cyeze (2009) argued that through sampling the
researcher can still draw valid conclusions on the basis of careful observation of
variables within a representative sample of the population. Ary believed, as Cyeze
(2009) pointed out that in social studies, a sample of 20 to 30% of the population is
appropriate for the study. On the other hand, Gay cited by Cyeze (2009) suggested
that 10% of the accessible population is enough and for experimental studies 30% is
required per group for greater accuracy. The sample for this study is drawn from
certified MFIs and MFIs certified external auditors. The researcher preferred 30% of
the certified MFIs, given that the greater the sample is the greater accuracy is. And
for the MFIs certified external auditors 10% was accessible and therefore enough as
the above author suggested. From the 30% of the total agreed MFIs, the size of the
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sample for MFIs was twenty six (26) MFIs. The sample was drawn from four
provinces - five certified MFIs in each province and from the Kigali City Council.
Six certified MFIs were selected, in order to cover the entire country of Rwanda. For
the MFIs certified external auditors, the total sample was seven and all were found in
Kigali City Council because that is from where all operate. Given the fact that
concurrent triangulation was applied, the researcher mixed the quantitative and
qualitative approaches. The probabilistic and non-probabilistic sampling methods
were used. Simple random sampling was the appropriate type of probabilistic
sampling method to use according to the nature of the study and the population from
which the sample was drawn. For the non-probabilistic methods, the researcher
selected the purposive sampling techniques to obtain information from MFIs. From
the two types of purposive sampling Cooper (2001), the researcher selected both
judgement to get individuals within the certified MFIs who can provide the right
knowledge on the corporate governance and the performance of MFIs in Rwanda,
like the Chairperson of the board of directors, the CEO, the head of finance, the head
of operations, the head of loan department and the head of internal audit. For the
quota sampling tecnhinques, the subjects were selected according to the same weigh
in assessing the correlation between the corporate governance and the performance
of MFIs in Rwanda. This means that from each selected MFI, the number of
respondents were the same.
Table 3.1: Sample Size
Category Population Sample size Justification/reason
MFIs 84 26 (30%) Greater accuracy for a group
External Auditors 67 7 (10%) Individual 10% is needed
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As Table 3.1 shows the population is made of 84 MFIs and 67 external auditors. The
sample size was 26 for certified MFIs or 30% of the total MFIs displayed in the four
provinces and in Kigali city. The external auditors are only in Kigali city. The rate of
respondents was 84.6% for the MFIs because twenty two (22) MFIs of the total
sample responded and only four did not respond. For the external auditors all of them
responded. The rate of response is very significant for the conclusions.
3.4 Research Instruments
Measurements refer to the tools to be used for collecting data and how those tools
have been developed. The instruments which were used to obtain data for analyzing
the correlation between the corporate governance and the performance of MFIs in
Rwanda included questionnaires, interviews and documentary analysis.
3.4.1 Questionnaire
To obtain data for this study, one of the instruments used was the questionnaire. This
type of instrument was designed basing on the related literature, the theoretical
framework and the conceptual framework. The questionnaire was designed in a
manner that it shows the relationship which was to be analysed throughout the
research duration. A questionnaire is a set of questions administered to persons or
respondents surveyed in a quantitative survey. It is also used to gather data from
individuals. The type of data which were to be collected from the questionnaires
were ordinal, this type of data are the most collected in business and social science
research. With nominal data, the researcher is collecting information on a variable
that naturally or by design can be grouped into two or more categories that are
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mutually exclusive and collective exhaustive (Cooper et al; 2001). For the
identification of the respondents, nominal data were used. Ordinal data include the
characteristics of nominal data plus an indicator of order, (Cooper et al., 2001).
Ordinal data are possible if the transitivity postulate is fulfilled; the postulate
stipulates that; if A is greater that B and B is greater than C, then A is greater than C.
Measures of stitiscal significance are technically confined to that body of methods
known as nonparametric methods, Cooper et al., (2001) argued. The questionnaire
contained closed-ended questions since they are easier to analyze in an immediate
usable form. They are also easier to administer because each item is followed by
multiple choices as they were in likert scale format (Cooper et al., 2001). However,
since their responses are limited, the respondents were compelled to answer to
questions according to the researcher’s choices. For this reason, the question also
incorporated some open – ended questions, with advantages according to Mugenda
cited by Cyeze (2009) as follows: they permit a greater in depth of response, they are
simpler to formulate mainly because the research has not to work out in order to get
the appropriate response and they can stimulate the respondent to think about his or
her feeling or motives and to express what he or she considers to be the most
important.
The questionnaire developed by the researcher was intended to capture the
correlation between the various constructs of the corporate governance (independent
variable) namely board size, board composition, non-CEO duality, supervision and
the measures of the performance of the MFIs (dependent variable) under the impact,
the outreach and the sustainability. In order to conceptualize the constructs, board
88
size was looked at through small size and big size of the board of directors. For the
board composition, the researcher went through by outsider versas the insider board
members. The non-CEO duality was dealt with by the CEO and Chairperson being
different persons. Finally the supervision was analyzed through internal and external
auditors.
The dependent variable was conceptualized in a way that captures the understanding
of respondents. The impact was analyzed through the social and economic living
conditions of MFIs customers; while outreach was understood through the number of
loans and customers of MFIs. Then the sustainability was seen through the debt
recovery and the profitability of MFIs in Rwanda.
The questions were designed in the five Likert Scale format. This is the most
frequently used variation of the summated rating scale (see appendix 2). Summated
scales consist of statements that express either a favourable or unfavourable attitude
toward the object of interest as Cooper et al., (2001) said. A minimum of 20 to 25
properly constructed questions about an attitude object would be required for a
reliable Likert scale. Likert scales help us compare one person’s score with a
distribution of scores from a well-defined sample group.
This measurement scale is useful for a manager when the organization plans to
conduct an experiment or undertake a programme of change or improvement
(Cooper et al., 2001). The researcher measured attitudes of respondents in order to
judge whether corporate governance of MFIs efforts has a desired effect on the
89
performance of those organizations. The research used a maximum of 36 questions
of five likert scale format (see appendix 2).
3.4.2 Interviews
Copper et al. (2001) define an interview as a conversation between two or more
people where questions are asked to obtained information about the interviewee.
Interview was used because it gave an opportunity for respondents to express
themselves more clearly and to expand more on the issue under investigation.
Data were also collected using interviews. In-depth interviews helped the researcher
to gather unexpressed opinions from the certified MFIs and external auditors.
Opinions were gathered from clients of MFIs in various provinces and in the Kigali
City Council, and the responsible of MFIs in the Central Bank. The focus groups
with different clients in the four provinces, gathering some from remote and some of
town and those of Kigali City Council helped the researcher to discover hidden
issues on corporate governance issues and performance of Microfinance Institutions,
especially those of social and economic living conditions. This helped in additional
interpretation of some issues for which the quantitative data were unable to find out
their meaning. The researcher used an interview made up of 42 questions compilling
the variables under study and the questions were grouped according to the
interviewees who could provide information on the Governance and performance
(Appendix 3).
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3.4.3 Documentary review
The documentary analysis is expected to enable the research to access information at
any time at his convenience. These pieces of information are data that are thoughtful
in that the informant has given attention in compiling them. This type of instrument
was used to collect data from books, reports, and statistics and from any other
relevant document.
The study used both ideographic and nomothetic approaches, but to a larger extent,
more focus was on the second type of approach, since the study was analysing
relationships among various variables using quantitative data. To do so, the
researcher used mathematical and statistical methods of data analysis. In order to
maintain the triangulation mode, both ideographic and nomothetic was used
concurrently. This meant that the concurrent triangulation was used.
The ideographic approach is based on the view that one can only understand the
social world by obtaining first-hand knowledge of the subject under investigation
(Ahiauzu, 2008). Ahiauzu further states that this approach helps getting close to
one’s subject and exploring its detailed background and life history using qualitative
data. The nomothetic approach, on the other hand, emphasizes the importance of
basing research on systematic techniques including the testing of hypotheses in
accordance with the canons of scientific rigour (ibid).
3.5 Validity of the Research Instruments
Data collected were analysed to discover whether or not there is a correlation
between independent and dependent variables. To ensure the validity of the
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measurements (Babbie and Mouton, 2001), the researcher used various research
directors from Rwandan Higher Learning Institutions located in Kigali to evaluate
and assess the degree of clarity and precision of the measurements before they were
brought to the subjects for data collection. Reliability is a necessary contributor to
validity (Cooper et al., 2001), because when a measurement is precise in what it
measures then its meaning, as far as the concept it is measuring, is also correct; at
that extent reliability has contributed to the validity. This section is analysing the
tools used to measure the performance of MFIs in Rwanda using the major criteria
for evaluation a measurement tools; these are validity, reliability and the
practicability.
3.6 Reliability of Research Instruments
The researcher used the Cronbach's Alpha coefficient in order to test the reliability of
instruments. The level of reliability is high when the alpha coefficient is closer to one
(Babbie and Mouton, 2001).
Table 3.2: Reliability test
Cronbach's Alpha Cronbach's Alpha Based on
Standardized Items Number of Items .949 .947 42
Throughout Table 3.2, it is shown that the reliability is closer to one, considering all
questions as a whole. When it is closer to one, it means that the degree of precision
of measurements is high as Babbie and Mouton (2001) said. The researcher wanted
to know the degree of precision for each construct of the independent variable looked
at the measures of the dependent variable.
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Table 3.3: Reliability test on small size of board of directors and performance of
MFIs in Rwanda
Cronbach's Alpha N of Items .936 6
To analyse the degree of precision taking into consideration the small size of the
board of directors and the performance of MFIs through its constructs, the table
above shows for the six items under study, the cronbach’s alpha is 0.936. This alpha
coefficient is too closer to one, as the literature said; the degree of precision is high.
Table 3.4: Reliability test on big size of board of directors and performance of
MFIs in Rwanda
Cronbach's Alpha N of Items
.720 6
To analyse the degree of precision taking into consideration the big size of the board
of directors and the performance of MFIs through its constructs, the table above
shows for the six items under study, the cronbach’s alpha is 0.720. This alpha
coefficient is high as the literature said; the alpha which is higher than 0.5 is good for
the degree of precision.
Table 3.5: Reliability test on outsider board members and performance of MFIs
in Rwanda
Cronbach's Alpha N of Items
.904 6
To analyse the degree of precision taking into consideration the outsider board
members and the performance of MFIs through its constructs, Table 3.5 shows for
93
the six items under study, the cronbach’s alpha is 0.904. This alpha coefficient is
closer to one, as the literature said; the degree of precision is high.
Table 3.6: Reliability test on insider board members and performance of MFIs
in Rwanda
Cronbach's Alpha N of Items
.876 6
To analyse the degree of precision taking into consideration the insider board members
and the performance of MFIs through its constructs, the table above shows for the six
items under study, the cronbach’s alpha is 0.876. This alpha coefficient is very high
comparing to the literature; therefore the degree of precision is also very high.
Table 3.7: Reliability test on independent audit and performance of MFIs in
Rwanda
Cronbach's Alpha N of Items
.916 6
To analyse the degree of precision taking into consideration the external audit and
the performance of MFIs through its constructs, Table 3.8 shows for the six items
under study, the cronbach’s alpha is 0.916. This alpha coefficient is closer to one, as
the literature said; the degree of precision is very high.
Table 3.8: Reliability test on internal audit and performance of MFIs in
Rwanda
Cronbach's Alpha N of Items
.786 6
94
To analyse the degree of precision taking into consideration the internal audit and the
performance of MFIs through its constructs, Table 3.9 shows that for the six items
under study, the cronbach’s alpha is 0.786. This alpha coefficient is big comparing
to 0.5 as the literature said, and then the dgree of precision is also high.
In conclusion, this alpha was the highest for the non-CEO duality compared to the
performance of MFIs which was 0.939. It was followed by the small size of the
board of the directors and performance of MFIs which was 0.936. The third was the
external audit 0.916 followed by the outsider board members 0.904 both compared to
the performance of MFIs. All these coefficients are too closer to one. It means that
the degree of precision is the highest. The remaining alpha coefficients, even if they
are not too closer to one, they are high comparing to the literature because they are
higher than 0.5. It means that they are also very good for the precision of the items
they are measuring.
3.7 Data Analysis
For data analysis, the researcher used the SPSS software. Descriptive statistics, like
frequency, standard deviations and cross-tabulations to find out whether or not there
is a correlation between corporate governance and performance of MFIs in Rwanda.
Thanks to the above software, tables were drawn and used to present clearly the
research findings and to make the analysis of data easier.
In order to find out the correlation between the variables under study, the researcher
grouped the frequencies of the Likert Scale in two categories. One category was of
those who agreed and strongly agreed on no correlation between the variables, and
another category of those who disagreed and strongly disagreed on no correlation
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between the two variables. In short the two categories were made of those who
favour the correlation and those who do not favour it. This approach helped the
researcher to use the cross-tabulation tables in order to test the hypotheses. Each
corporate governance mechanism was crosstabulted to the measures of performance
of MFIs in Rwanda. From this, the researcher produced the frequencies of the
grouped views of respondents and the Chi-Square was computed in order to find out
whether or not there is a correlation between the corporate governance and the
performance of MFIs in Rwanda.
3.8 Ethical Considerations
Because researchers are people dealing with other people’ quality of life, they must
be people of integrity who will not undertake research for personal gain or research
that will have a negative effect on others. Other reasons for being completely ethical
in research is that there are laws which prohibit unethical behaviour and researchers
could be faced with extremely humiliating situations if such laws are ignored as
Mugenda (2003) said cited by Cyeze (2009).
For ethical purposes; permission from the Central Bank, the institution in charge of
supervising MFIs in Rwanda from which the study was conducted, was obtained
before data collection. A cover letter that explained the ethical considerations of this
study and appeals for voluntary participation was attached to the questionnaire. In
addition, the researcher showed that the anonymity of the respondents will be
maintained; respondents were assured that their responses will be treated with
confidentiality and be used only for the purposes of this research.
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CHAPTER FOUR
4.0 RESEARCH FINDINGS, DATA ANALYSIS AND DISCUSSION 4.1 Introduction
This chapter deals with presenting the research findings and analysis of data in line
with the research hypotheses. It is split into five sections. The first being the
identification of respondents, their gender, age, marital status, study background and
their qualifications. The second section is about the research findings and analysis of
data on the board size and performance of MFIs. The third section is made of
research findings and analysis of data on the board composition and the performance
of MFIs. The fourth section is made of research findings and analysis of data on the
non-CEO duality and performance of MFIs. The fifth section is made of research
findings and analysis of data on the supervision and performance of MFIs.
4.2 Identification of Respondents
Table 4.1: Distribution of Respondents by their gender
Gender Frequency Percent Valid Percent Cumulative Percent
Valid Male 55 39.6 39.6 39.6
Female 84 60.4 60.4 100.0
Total 139 100.0 100.0
Source: Primary data, September 2011
As Table 4.1 shows, female respondents are 84 (60.4 %) while male respondents are
55 (39.6 %). This demonstrates that the majority of MFIs in Rwanda are run by
ladies. One of the reasons could be due to the encouragement Government gives to
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ladies to participate in economic, social and political activities of the country.
Another reason may be due to economically empowering women in order to fight
against poverty.
Table 4.2: Distribution of respondents by their age
Age of respondents Frequency Percent
Valid
Percent
Cumulative
Percent
Valid less or equal to 21 2 1.4 1.4 1.4
more than 21 and
less or equal to 25 43 30.9 30.9 32.4
more than 25 and
less or equal to 30 48 34.5 34.5 66.9
more than 30 and
less or equal to 35 26 18.7 18.7 85.6
More than 35 20 14.4 14.4 100.0
Total 139 100.0 100.0
Source: Primary data, September 2011
Table 4.2 shows that 2 (1.4%) respondents were the youngest meaning in the age less
than 21. The respondents between the age of 21 and 25 were 43 or 30.9 %; while
those of above but not more than 30 were 48 (34.5 %). Respondents of more than 30
and less or equal to 35 of age were 26 that is 28.7 %. 20 respondents were of more
than 35 of age. The biggest portion of the respondents was of more than 25 or less or
equal to 30. Table 4.2 shows that the MFIs industry in Rwanda is has young staff
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because 65.4% of the respondents are of more than 21 but less or equal to 30. One of
the reasons could be due the number of individuals within those age brackets who
complete their studies and start working in various companies including MFIs.
Table 4.3: Distribution of respondents by their marital status
Marital status Frequency Percent Valid
Percent Cumulative Percent Valid Single 47 33.8 33.8 33.8 Married 60 43.2 43.2 77.0 widow 22 15.8 15.8 92.8 divorced 10 7.2 7.2 100.0 Total 139 100.0 100.0
Source: Primary data, September 2011
Table 4.3 which displays the marital status of the respondents shows that many of
them, 60 (43.2%) respondents are married. While 47 (33.8%) are single. Widows are
22 (15.8%) and 10 (7.2%) are divorced. This shows that the MFIs has a social
objective among others, many of these widows are of genocide against Tutsis. One
of the possible reasons why 47% of the respondents are single is that some of them
have just left school and begun working. 60% are married which means some have
been working for some years and have managed to get families.
Table 4.4: Distribution of respondents by their study background
Frequency Percent Valid
Percent Cumulative
Percent Valid Accounting 15 10.8 10.8 10.8 Finance 55 39.6 39.6 50.4 General
Management 50 36.0 36.0 86.3
Economics 16 11.5 11.5 97.8 Others 3 2.2 2.2 100.0 Total 139 100.0 100.0
Source: Primary data, September 2011
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Given that the MFIs deal with savings, loans and other related services, most of the
respondents were in the fields which are closer to the business of MFIs. Many
respondents 55 (39.6%) out of 139 (100%) respondents were from the domain of
finance; these respondents alone are of 39.6%. The second in number 50 (36%) out
of 139 (100%) respondents were from the domain of general management, they are
of 36%. The third is economics and the fourth is accounting, respectively 16 (11.5%)
and 15 (10.8%) out of 139 (100%) respondents. Respondents from other domains
were 3 (2.2%) out of 139 (100%) respondents; they were from either sociology or
law domains.
Table 4.5: Distribution of respondents by their qualification
Qualification Frequency Percent Valid
Percent Cumulative
Percent Valid Master's degree 36 25.9 25.9 25.9
Bachelor's degree 79 56.8 56.8 82.7
Diploma 24 17.3 17.3 100.0
Total 139 100.0 100.0
Source: Primary data, September 2011
The Table 4.5 displays the various qualifications of the respondents. The bachelor’s
holders were 79 (56.8%) of the total respondents. Second comes the Master’s degree
holders for which respondents are 36 (25.9%) of the total 139(100%). Last were the
respondents of Diploma, 24 (17.3%) out of the total respondents of 139 (100%). The
Table shows clearly that the MFI’s industry in Rwanda is made of qualified
personnel, auditors and CEOs. This is in response to Government requirement that
companies should be managed by qualified staff. In Rwanda, like other African
countries, most of the employees possess a Bachelor’s degree.
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4.3 Board Size and Performance of MFIs in Rwanda
Within this section the findings are summarized in two subsections namely small size
of the board of directors and the performance of MFIs and big size of the board of
directors and the performance of MFIs in Rwanda. This section deals with the first
hypothesis which states as follows:
Ho (1): There is no correlation between the board size and the performance of MFIs
in Rwanda
4.3.1 Small Size of the Board of MFIs and performance of MFIs
This subsection deals with the research findings and analysis of data related to the
first hypothesis.
Table 4.6: Frequency on small size and social living conditions
Frequency Percent Valid
Percent Cumulative
Percent Valid Strongly agree 6 4.3 4.3 4.3 Agree 8 5.8 5.8 10.1 Neither agree
nor disagree 7 5.0 5.0 15.1
Disagree 28 20.1 20.1 35.3 Strongly
disagree 90 64.7 64.7 100.0
Total 139 100.0 100.0 Source: Primary data, September 2011
Table 4.6, clearly shows that, most of the respondents strongly disagree that there is
no correlation between small size of the board of directors and the social living
conditions of MFIs’. Respondents represent 90 (64.7 %) while the respondents who
only disagree represent 28 (20.1%). The neutral respondents - who do not lean to
any position, are at 5%, meaning that they don’t have any knowledge about that
relationship. Only 10.1 %, representing the respondents who agree and those who
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strongly agree that there is no correlation between small size of the board of directors
and the social living conditions of customers of MFIs.
The possible reasons for many respondents strongly disagree on that correlation are
that even the regulations in Rwanda say that an effective board of directors should
not have more than five members. Respondents choosing this alternative were basing
themselves on the law on board of directors in Rwanda. Those who strongly
disagreed that there was no relationship based on what is observed in the social
living conditions of MFIs’ customers knowing that the boards are not large. That is
why many respondents - 90 out of 139 respondents strongly disagreed. When one
compares with the remaining alternatives, those who disagreed come second level in
terms of numbers and this once again confirms that relationship. The rest of the
respondents (15.1 %) did not recognize the relationship. One other reason could be
that a small size of the board takes a reasonable amount of money in terms of
remuneration and this low remuneration could be extended to customers in terms of
lower charges for services offered by MFIs.
Table 4.7: Frequency on small size and economic living conditions
Frequency Percent Valid
Percent Cumulative
Percent Valid Strongly
agree 5 3.6 3.6 3.6
Agree 13 9.4 9.4 12.9 Neither agree
nor disagree 7 5.0 5.0 18.0
Disagree 32 23.0 23.0 41.0 Strongly
disagree 82 59.0 59.0 100.0
Total 139 100.0 100.0
Source: Primary data, September 2011
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Throughout Table 4.7, it is clear to any who is reading it, those who strongly
disagreed that small size of the board of directors has no correlation with the
economic living conditions of MFIs’ customers represent 82 (59%) while
respondents who only disagreed were 32 (23%). This shows to the researcher that
most of the respondents think that the small size of the board of directors has a
correlation with the economic living of MFIs’ customers. The neutral respondents –
i.e. those who did not have any position, were 7 (5%), meaning that they didn’t have
any knowledge about that relationship. Only 18 (13%) respondents agreed and
strongly agreed that there was no correlation between small size of the board of
directors and the economic living conditions of customers of MFIs.
Comparing the two preceding Tables, it is obvious that if there is an improvement on
the economic living conditions, the social ones will improve also according to the
majority of the respondents. As Table 4.7 shows it, 82 out of 139 respondents
strongly disagreed that there was no relationship between the small size and the
economic living conditions change. Most of the respondents were of the opinion that
small size of Board of Directors of their MFIs had an impact on the economic
changes of the customers of MFIs. That is why they strongly agreed. One other
reason could be that a small size of the board takes a reasonable amount of money in
terms of remuneration and this low remuneration could be extended to customers in
terms of lower charges for services offered by MFIs.
103
Table 4.8: Frequency on small size and number of customers
Frequency Percent Valid
Percent Cumulative Percent
Valid Strongly agree 9 6.5 6.5 6.5
Agree 14 10.1 10.1 16.5
Neither agree nor disagree 6 4.3 4.3 20.9
Disagree 29 20.9 20.9 41.7
Strongly disagree 81 58.3 58.3 100.0
Total 139 100.0 100.0
Source: Primary data, September 2011
According to Table 4.8, it is clear that those who strongly disagreed that small size of
the board of directors does not correlate to the increase of the number of customers
of MFIs were 81 (58.3 %); while respondents who disagreed represent 29 (20.9%).
Both total to 110 (79.2%). This shows to the researcher that the majority of
respondents think that small size of the board of directors has correlation with the
increase of the numbers of MFIs’ customers at 79.2%. The respondents who did not
have any position were 6 (4.3%), meaning that they don’t have any knowledge about
that relationship. A total of 23 (16.6%) of the respondents, agree and strongly agree
on no correlation between small size of the board of directors and the increase of the
MFIs’ customers.
In Table 4.8, the researcher found that most of the respondents said that small size of
the board of directors of MFIs had a correlation with the increase of the number of
customers. This might be a consequence of socio economic changes on the
customers. Rwanda, being a small country as stated in the methodological part,
citizens are located close to each other. This means that the information on why the
104
living conditions have changed from a household is spread easily without any other
marketing strategy. As it is known, a satisfied customer brings another while a
disappointed one goes with others and makes barriers for entry to new customers.
Another reason could be due to the general belief that a small number of people
reach consensus quite easily and that improves the quality of decision making and
that could attract more customers.
Table 4.9: Frequency on small size of a board and number of loans extended to
customers
Frequency Percent Valid
Percent Cumulative
Percent Valid Strongly agree 5 3.6 3.6 3.6
Agree 6 4.3 4.3 7.9
Neither agree
nor disagree 13 9.4 9.4 17.3
Disagree 28 20.1 20.1 37.4
Strongly
disagree 87 62.6 62.6 100.0
Total 139 100.0 100.0
Source: Primary data, September 2011
Table 4.9, show 87 (62.6%) of respondents strongly disagree that small size of the
board of directors has no correlation with the increased number of loans to MFIs’.
While the respondents who only disagree were 28(20.1%). Both totaled 115(82.7%).
This shows to the researcher that most of the respondents were of the view that small
size of the board of directors has correlation with the increase of the loans to MFIs’
customers at 82.7%. The respondents who did not have any position formed
13(9.4%), meaning that they didn’t have any knowledge about that relationship. A
105
total of 11(7.9 %) of respondents agreed and strongly agreed that there was no
relationship between small size of board and the increase of loans to customers of
MFIs.
The strong disagreement that there was no correlation between the small size of
board of directors of MFIs and the increase of the number of laons issued by
customers is possibly explained by the fact that MFIs have different categories of
customers. Some are grouped in order to have a strong and convincing collateral
toward the loans’ officers of MFIs. These loan are sometimes of very short term, like
a week, two weeks or a month or a quarter year or even a year, and rarely of more
that three years. Once any category of customer pays back the loan issued, the MFI
trusts this customer and may consider them for another loan. Given that a small sized
board makes candid discussions and makes quick resolutions hence the respondents
tended to associate the increase of customers with the small size of board of
directeors of MFIs. Another reason could be due to the general belief that a small
number of people reach consensus quite easily and that could result in an increase in
number of loans that are extended to customers.
Table 4.10: Frequency on small size and debt recovery
Frequency Percent Valid
Percent Cumulative Percent Valid Strongly agree 10 7.2 7.2 7.2 Agree 11 7.9 7.9 15.1 Neither agree
nor disagree 9 6.5 6.5 21.6
Disagree 26 18.7 18.7 40.3 Strongly
disagree 83 59.7 59.7 100.0
Total 139 100.0 100.0
Source: Primary data, September 2011
106
Table 4.10 shows that 83 (59.7 strongly disagreed that small size of the board of
directors had no correlation with the debt recovery by MFIs from customers. While
the respondents who only disagree were 26 (18.7%) Both make a total of 78.4%.
This shows to the researcher that the small size of the board of directors has a
correlation with the debt recovery by MFIs from their customers at 78.4% according
to the respondents’ opinions. The respondents who do not have any position were 9
(6.5%), meaning that they didn’t have any knowledge about that relationship. Only
11 (7.9%) represent respondents who agreed; and those who strongly agreed on no
correlation between small size of the board of directors and the debt recovery by
MFIs were 10 (7.2%).
A big portion of respondents, that is 83 out of 139, strongly disagreed that there was
no correlation between the small size of the board of directors and the debt recovery.
The reasons may be because it is very easy for a small number of persons to set
strategies and make a follow up of the implementation of the strategies. If the MFIs
in Rwanda have not failed since 2006, it means that the debt recovery was efficient
Central Bank of Rwanda (2008).
Table 4.11: Frequency on small size and profitability
Frequency Percent Valid
Percent Cumulative Percent Valid Strongly agree 7 5.0 5.0 5.0 Agree 9 6.5 6.5 11.5 Neither agree
nor disagree 9 6.5 6.5 18.0
Disagree 27 19.4 19.4 37.4 Strongly
disagree 87 62.6 62.6 100.0
Total 139 100.0 100.0
Source: Primary data, September 2011
107
Table 4.11 shows that those who strongly disagreed that small size of the board of
directors had no correlation with the profitability of MFIs were 87(62.6%) while the
respondents who disagreed were 27(19.4%). Both made a total of 114(82%). This
shows to the researcher that respondents are of the view that the small size of the
board of directors has a correlation with the profitability of MFIs. The respondents
who did not have any position were 9(6.5%), meaning that they did’t have any
knowledge about that relationship. Only16 (11.5 %) respondents agreed and those
who strongly agreed on no relationship between small size of the board of directors
and the profitability of MFIs.
Given that some of the MFIs started as small and with the time they grew to become
big, it is an indicator of profitability. If customers get their living conditions
changing positively, and the loans increasing, the profitability increases also
provided the loans are recovered. This small size of the board of directors of MFIs
has a correlation with the performance of MFIs as the survey indicated through the
various tables above under the subsection of small size of the board and the
performance of MFIs in Rwanda. In a summary, a small board is seen to lead to
profitability because less money is spent on it in terms of remuneration and it is seen
to be effective in debt collection and takes quick decisions on other matters.
4.3.2 Big size of board and performance of MFIs
This subsection deals also with the research findings and analysis of data related to
the first hypothesis.
108
Table 4.12: Frequency on big size and social living conditions
Frequency Percent Valid
Percent Cumulative
Percent Valid Strongly agree 7 5.0 5.0 5.0 Agree 17 12.2 12.2 17.3 Neither agree nor disagree 37 26.6 26.6 43.9 Disagree 36 25.9 25.9 69.8 Strongly disagree 42 30.2 30.2 100.0 Total 139 100.0 100.0
Source: Primary data, September 2011
Table 4.12 shows clearly that respondents strongly disagreed on big size of the board
of directors has no correlation with the social living conditions of the MFIs’
customers at 42(30.2%) while the respondents who disagreed were 36(25.9%). This
displays that 78 respondents (56.1%) confirmed that the relationship does exist. This
shows to the researcher that the big size of the board of directors has a correlation
with the social living conditions of the MFIs’ customers as viewed by respondents.
The respondents who do not have any position are at 37(26.6%), meaning that they
didn’t have any knowledge about that relationship. Only 17(12.2%) and 7(5%)
respectively agreed and strongly agreed on no relationship between big size of the
board of directors and the social living conditions of the MFIs’ customers.
Table 4.13: Frequency on big size and economic living conditions
Frequency Percent Valid
Percent Cumulative
Percent Valid Strongly agree 7 5.0 5.0 5.0 Agree 11 7.9 7.9 12.9 Neither agree nor
disagree 37 26.6 26.6 39.6
Disagree 55 39.6 39.6 79.1 Strongly disagree 29 20.9 20.9 100.0 Total 139 100.0 100.0
Source: Primary data, September 2011
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Table 4.13 demonstrates that respondents who strongly disagreed that big size of the
board of directors had no correlation with the economic living conditions of the
MFIs’ customers at 29(20.9%), while the respondents who disagreed on that
relationship were 55(39.6%). This means that 60.5% confirmed that the correlation
did not exist. This shows to the researcher that the big size of the board of directors
has a correlation with the economic living conditions of the MFIs’ customers
according to the respondents’ views. Surprisingly, the respondents who did not have
any position were 37(26.6%) as for the relationship between big size and social
living conditions of MFIs’ customers, meaning that they don’t have any knowledge
about that relationship. Only 11(7.9%) and 7(5%) respectively agreed and strongly
agreed on no relationship between big size of the board of directors and the
economic living conditions of the MFIs’ customers. From this table, one may ask
himself if really the big size of the board of directors has a correlation with the
economic living conditions of MFIs’ customers because those who did not have any
position and those who agree are of a greater percentage comparing to those who
strongly agreed.
Table 4.14: Frequency on big size and number of customers
Frequency Percent Valid
Percent Cumulative Percent Valid Strongly agree 6 4.3 4.3 4.3 Agree 12 8.6 8.6 12.9 Neither agree
nor disagree 41 29.5 29.5 42.4
Disagree 56 40.3 40.3 82.7 Strongly
disagree 24 17.3 17.3 100.0
Total 139 100.0 100.0
Source: Primary data, September 2011
110
The Table 4.14 illustrates that 17.3% of the respondents strongly disagreed that big
size of the board of directors had no correlation with the increase of the number of
the MFIs’ customers. While those who disagreed represented 40.3% of the
respondents. This displays that 57.6% of the respondents confirmed that the
relationship does exist. This shows to the researcher that the big size of the board of
directors has a correlation with the increase of the number of the MFIs’ customers
the MFIs’ customers according to the views of respondents. Surprisingly, the
respondents who did not have any position represented 29.5% of the respondents as
for the relationship between big size and increase of the number of the MFIs’
customers; meaning that they don’t have any knowledge about that relationship.
Only 8.6% and 4.3% respectively agreed and strongly agreed on no relationship
between big size of the board of directors and the increase of the number of
customers of the MFIs’. From this table, one may ask himself if really the big size of
the board of directors has a positive correlation with the increase of the number of
customers of MFIs because those who did not agree or disagree are of a greater
percentage comparing to those who strongly agreed.
Table 4.15: Frequency on big size and number of loans
Frequency Percent Valid
Percent Cumulative
Percent Valid Strongly agree 9 6.5 6.5 6.5
Agree 15 10.8 10.8 17.3
Neither agree nor disagree 32 23.0 23.0 40.3
Disagree 60 43.2 43.2 83.5
Strongly disagree 23 16.5 16.5 100.0
Total 139 100.0 100.0
Source: Primary data, September 2011
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The Table 4.15 above illustrates that 23(16.5%) of the respondents strongly
disagreed that big size of the board of directors had no correlation with the increase
of the number of loans issued by MFIs to customers. While those who disagreed
represented 60 (43.2%). This displays that 83(59.7%) confirmed that the relationship
did exist. This shows to the researcher that the big size of the board of directors has a
correlation with the increase of the number of loans issued by MFIs to customers.
Surprisingly, the respondents who did not have any position represent 32(23%) as for
the relationship between big size and increase of the number of the MFIs’ customers,
meaning that they don’t have any knowledge about that relationship. Only
15(10.8%) and 9(6.5%) respectively agreed and strongly agreed on no relationship
between big size of the board of directors and the increase of the number of loans
issues by MFIs’to customers. From Table 4.15, one may ask himself if really the big
size of the board of directors has a correlation with the increase of the number loans
issued by MFIs to customers because those who did not have position and those who
agree or strongly agree are of a greater percentage comparing to those who strongly
disagreed.
Table 4.16: Frequency on big size and debt recovery
Frequency Percent Valid
Percent Cumulative
Percent Valid Strongly agree 7 5.0 5.0 5.0
Agree 22 15.8 15.8 20.9
Neither agree nor disagree 29 20.9 20.9 41.7
Disagree 57 41.0 41.0 82.7
Strongly disagree 24 17.3 17.3 100.0
Total 139 100.0 100.0
Source: Primary data, September 2011
112
Table 4.16 illustrates that repondents who strongly disagreed that big size of the
board of directors had no correlation with the debt recovery represent 24(17.3%).
While those who disagreed about that relationship represented 57(41%). This
displays that 81(58.3%) confirmed that the relationship does exist; this shows to the
researcher that the big size of the board of directors has a correlation with the debt
recovery within MFIs because many of respondents say that. The respondents who
did not have neither agreed nor disagreed represent 29(20.9%) as for the relationship
between big size and debt recovery in the MFIs in Rwanda, meaning that they don’t
have any knowledge about that relationship or simply they doubt about it.
Respectively 22 (15.8%) and 7(5%), agreed and strongly agreed on no relationship
between big size of the board of directors and the debt recovery.
Table 4.17: Frequency on big size and profitability
Frequency Percent
Valid
Percent Cumulative Percent
Valid Strongly agree 17 12.2 12.2 12.2
Agree 45 32.4 32.4 44.6
Neither agree
nor disagree 34 24.5 24.5 69.1
Disagree 27 19.4 19.4 88.5
Strongly
disagree 16 11.5 11.5 100.0
Total 139 100.0 100.0
Source: Primary data, September 2011
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Table 4.17 illustrates that respondents who strongly disagreed on big size of the
board of directors has no correlation with the profitability of the MFIs represent only
16(11.5%) while those who disagreed represent 27(19.4%). This displays that only
43(30.9%) confirmed that the relationship does exist; this shows to the researcher
that the big size of the board of directors has less positive correlation with the
profitability of the MFIs. Surprisingly, the respondents who neither agreed nor
disagreed about that relationship represent 34(24.5%). This means that they don’t
have any knowledge about the relationship between the big size of board of directors
and the profitability of MFIs in Rwanda.
This is somehow confirmed by the high rate of the respondents who agreed about the
above mentioned relationship, the respondents represent 45(32.4%) of the total of
respondents. Those who strongly agreed on no relationship represent 17(12.2%).
From this table, one may conclude that the majority of the respondents, representing
62(44.6%), confirmed that the big size of the board of directors has no correlation
with the profitability of MFIs in Rwanda. This has been supported by the small size
of the board. From the findings on the frequencies calculations, what is discovered
by the researcher is that many respondents were agreeing or strongly agreeing on no
correlation between the big size of the board of directors and the various measures of
the performance of MFIs in Rwanda.
4.3.5 Testing the hypothesis number one
This subsection deals with determining whether or not there is a correlation between
the board size and the performance of MFIs in Rwanda using the crosstabulation.
114
The crosstabulation was to get opinions from respondents on the non-correlation
between the size of the board of directors; as one of the variables of corporate
governance and the ones of performance of MFIs in Rwanda; the researcher
crosstabulated those various variables to find out their opinions.
Table 4.18: Size of the board and social living conditions Crosstabulation
No correlation between big size and
social living conditions Total
Agree Disagree No correlation between small size and social living conditions
Agree Count
12 2 14
% within small size and social living conditions
85.7% 14.3% 100.0%
% within big size and social living conditions 19.7% 2.6% 10.1%
% of Total 8.6% 1.4% 10.1%
Disagree Count 49 76 125 % within small size
and social living conditions
39.2% 60.8% 100.0%
% within big size and social living conditions
80.3% 97.4% 89.9%
% of Total 35.3% 54.7% 89.9%
Total
Count 61 78 139
% within small size and social living conditions
43.9% 56.1% 100.0%
% within big size and social living conditions
100.0% 100.0% 100.0%
% of Total 43.9% 56.1% 100.0%
Source: Primary data, September 2011
115
From this crosstabulation frequency table, those who agreed up on the no correlation
between the small size and the social living conditions of MFIs’ customers are 12
(85.7%) out of 14 (100%). While those who agreed on no correlation between the big
size and the social living conditions of MFIs’ customers are 12 (19.7%) our of 61
(100%).
The respondents who disagreed that there was no correlation between the small size
of the board of directors and the social living conditions of MFIs’ customers were 76
(60.8%) out of 125 (100%). Those who disagreed on the no correlation between the
big size of the board of directors and the social living conditions were 76 (97.4%) out
of 78 (100%); the total sample being 139 respondents as the table shows them.
The Table 4.18 shows that only 12(8.6%) out of 139 (100%) respondents agreed on
the statement of no correlation between the board size and the impact of MFIs on the
customers social living conditions, while a total of 76(54.7%) out of 139(100%)
disagreed on that statement. The remaining were the respondents who did neither
agreed or disagreed on the above mentioned statement.
From these opinions, one may confirm that respondents think that board size
correlates with social living conditions of MFIs’ customers in Rwanda.
116
Table 4.19: Chi-Square Tests of the size of the board and social living conditions
Value df
Asymp.
Sig. (2-
sided)
Exact
Sig. (2-
sided)
Exact
Sig. (1-
sided)
Pearson Chi-Square 11.061(b) 1 .001
Continuity
Correction(a) 9.253 1 .002
Likelihood Ratio 11.719 1 .001
Fisher's Exact Test .001 .001
Linear-by-Linear
Association 10.982 1 .001
N of Valid Cases 139
a Computed only for a 2x2 table
Source: Primary data, September 2011
From Table 4.19 it is observed that the calculated Chi-Square value is 11.061 while
the critical value is 3.841 at a 95%. Since the calculated value is greater than the
critical value, the null hypothesis was rejected. Therefore, this test shows that there is
a correlation between the size of the board and the social living conditions of MFIs’
customers.
117
Table 4.20: Size of the board and economic living conditions Crosstabulation
No correlation
between big size and
economic living
conditions Total
Agree Disagree
No correlation
between Small size
and economic living
conditions
Agree Count
12 13 25
% within Small size
and economic living
conditions
48.0% 52.0% 100.0%
% within big size
and economic living
conditions
21.8% 15.5% 18.0%
% of Total 8.6% 9.4% 18.0%
Disagree Count 43 71 114
% within Small size
and economic living
conditions
37.7% 62.3% 100.0%
% within big size
and economic living
conditions
78.2% 84.5% 82.0%
% of Total 30.9% 51.1% 82.0%
Total Count 55 84 139
% within Small size
and economic living
conditions
39.6% 60.4% 100.0%
% within big size
and economic living
conditions
100.0% 100.0% 100.0%
% of Total 39.6% 60.4% 100.0%
Source: Primary data, September 2011
118
Table 4.20 shows that respondents who agreed on no correlation between the small
size of the board of directors of MFIs and the economic living conditions were 12
(48%) out of 25 (100%). Whilst those who agreed on no correlation between the
small size of the board of directors and the economic living conditions of MFIs’
customers in Rwanda were 12 (21.8%) out 55 (100%).
When it came to those who disagreed on no correlation between the small size of the
board of directors and the economic living conditions of MFIs’ customers in
Rwanda, Table 4.20 displays 71(62.3%) out of 114 (100%); and those who disagreed
on the no correlation between the big size of the board of directors and the economic
living conditions of MFIs’ customers in Rwanda were 71(84.5%) out of 84 (100%).
The Table 4.20 shows that only 12(8.6%) out of 139 (100%) respondents agreed on
the statement of no correlation between the board size and the impact of MFIs on the
customers economic living conditions, while a total of 71(51.1%) out of 139(100%)
disagreed on that statement. The remaining were the respondents who neither agreed
or disagreed on the above mentioned statement. From these opinions, one may
confirm that respondents think that board size correlates with economic living
conditions of MFIs’ customers in Rwanda.
119
Table 4.21: Chi-Square Tests of the size of the board and the economic living
conditions
Value Df
Asymp.
Sig. (2-
sided)
Exact
Sig. (2-
sided)
Exact Sig. (1-
sided)
Pearson Chi-
Square .906(b) 1 .341
Continuity
Correction(a) .527 1 .468
Likelihood Ratio .893 1 .345
Fisher's Exact
Test .372 .233
Linear-by-Linear
Association .900 1 .343
N of Valid Cases 139
a Computed only for a 2x2 table
Source: Primary data, September 2011
From Table 4.21, it is observed that the calculated Chi-Square value is .906 while the
critical value is 3.841 at a degree of precision of 95%. Since the calculated value is
less than the critical value, the null hypothesis was accepted. Therefore, this test
shows that there is no correlation between the size of the board of directors and the
economic living conditions of MFIs’ customers. The test is not statistically
significant.
120
Table 4.22: Size of the board and number of customers Cross tabulation
No correlation
between big size
and number of
customers Total
Agree Disagree
No correlation
between Small size
and increase of
custmers
Agree Count
17 12 29
% within Small size
and increase of
custmers
58.6% 41.4% 100.0%
% within big size and
number of customers 28.8% 15.0% 20.9%
% of Total 12.2% 8.6% 20.9%
Disagree Count 42 68 110
% within Small size
and increase of
custmers
38.2% 61.8% 100.0%
% within big size and
number of customers 71.2% 85.0% 79.1%
% of Total 30.2% 48.9% 79.1%
Total Count 59 80 139
% within Small size
and increase of
custmers
42.4% 57.6% 100.0%
% within big size and
number of customers 100.0% 100.0% 100.0%
% of Total 42.4% 57.6% 100.0%
Source: Primary data, September 2011
121
Table 4.22 illustrates that the respondents who agreed that there was no correlation
between the small size of the board of directors and the increase of customers, were
17 (58.6%) out 29 (100%). And those who agreed on no correlation between the big
size of the board of directors and the increase of the number of MFIs’ customers
were 17 (28.8%) out of 59 (100%).
The same Table shows that the respondents who disagreed on the statement that
there no correlation between the small size and the increase of the number of MFIs’
customers are 68 (61.8%) out of 110 (100%); and those who disagreed on the
statement that no correlation between big size of the board of directors and the
increase of the number of MFIs’ customers are 68 (85%) out of 80 (100%).
Table 4.22 shows that only 17(8.6%) out of 139 (100%) respondents agreed on the
statement of no correlation between the board size and the outreach of MFIs as far
the increase of the number of customers is concerned, while a total of 68(48.9%) out
of 139(100%) disagreed on that statement. The remaining were the respondents who
did neither agreed or disagreed on the above mentioned statement.
From these opinions, one may confirm that respondents think that board size does
not correlate with outreach as far as the increase of MFIs’ customers is concerned in
Rwanda.
122
Table 4.23: Chi-Square Tests of the size of the board and the number of
customers
Value df
Asymp. Sig.
(2-sided)
Exact Sig.
(2-sided)
Exact Sig.
(1-sided)
Pearson Chi-Square 3.924(b) 1 .048
Continuity
Correction(a) 3.132 1 .077
Likelihood Ratio 3.886 1 .049
Fisher's Exact Test .058 .039
Linear-by-Linear
Association 3.896 1 .048
N of Valid Cases 139
a Computed only for a 2x2 table
Source: Primary data, September 2011
Table 4.23 shows that the calculated Chi-Square value is 3.924 while the critical
value is 3.841 at a degree of precision of 95%. Since the calculated value is greater
than the critical value, the null hypothesis was rejected. Therefore, this test shows
that there is a correlation between the size of the board of directors and the increase
of number of customers. This test is statistically significant.
123
Table 4.24: Size of the board and number of loans Crosstabulation
No correlation
between big size
and number of
loans Total
Agree Disagree
No correlation
between Small
size and increase
of loans
Agree Count
13 11 24
% within Small size
and increase of loans 54.2% 45.8% 100.0%
% within big size
and number of loans 23.6% 13.1% 17.3%
% of Total 9.4% 7.9% 17.3%
Disagre
e
Count 42 73 115
% within Small size
and increase of loans 36.5% 63.5% 100.0%
% within big size
and number of loans 76.4% 86.9% 82.7%
% of Total 30.2% 52.5% 82.7%
Total Count 55 84 139
% within Small size
and increase of loans 39.6% 60.4% 100.0%
% within big size
and number of loans 100.0% 100.0% 100.0%
% of Total 39.6% 60.4% 100.0%
Source: Primary data, September 2011
124
Table 4.24 shows clearly that respondents who agreed on the statement of no
correlation between the small size of the board of directors and the increase of the
number of loans issued by MFIs in Rwanda were 13 (54.2%) out of 24 (100%); and
those who agreed on no correlation between the big size of the board of directors and
the increase of the number of loans issued by MFIs to their customers were 13
(23.6%) out of 55 (100%).
Those who disagreed on no correlation between the small size of the board of
directors and the increase of the number of loans issued by MFIs were 73 (63.5%)
out of 115 (100%); and those who disagreed on no correlation between the big size
of the board of directors and the increase of the number of loans issued to MFIs’
customers in Rwanda were 73 (86.9%) out of 84 (100%)
Table 4.24 shows that only 13(9.4%) out of 139 (100%) respondents agreed on the
statement of no correlation between the board size and the outreach of MFIs as far as
the increase of the number of loans is concerned, while a total of 73(52.5%) out of
139(100%) disagreed on that statement. The remaining were the respondents who did
neither agreed or disagreed on the above mentioned statement.
From these opinions, one may confirm that respondents think that board size
correlates with the outreach of MFIs as far as the increase of number of loans is
concerned in Rwanda.
125
Table 4.25: Chi-Square Tests of the size of the board and the number of loans
Value df
Asymp.
Sig. (2-
sided)
Exact
Sig. (2-
sided)
Exact Sig. (1-
sided)
Pearson Chi-
Square 2.323(b) 1 .127
Continuity
Correction(a) 1.678 1 .195
Likelihood Ratio 2.281 1 .131
Fisher's Exact
Test .170 .098
Linear-by-Linear
Association 2.306 1 .129
N of Valid Cases 139
a Computed only for a 2x2 table
Source: Primary data, September 2011
From Table 4.25 the calculated Chi-Square value is 2.323 while the critical value is
3.841 at a degree of precision of 95%. Since the calculated value is less than the
critical value, the null hypothesis was accepted. Therefore, this test shows that there
is no correlation between the size of the board and the number of loans to MFIs’
customers. This test is not statistically significant but at 10%, it would be significant.
126
Table 4.26: Size of the board and debt recovery Crosstabulation
No correlation
between big size
and debt
recovery Total
Agree Disagree
No correlation
between small size
and debt recovery
Agree Count
17 13 30
% within small size and
debt recovery 56.7% 43.3% 100.0%
% within big size and
debt recovery 29.3% 16.0% 21.6%
% of Total 12.2% 9.4% 21.6%
Disagree Count 41 68 109
% within small size and
debt recovery 37.6% 62.4% 100.0%
% within big size and
debt recovery 70.7% 84.0% 78.4%
% of Total 29.5% 48.9% 78.4%
Total Count 58 81 139
% within small size and
debt recovery 41.7% 58.3% 100.0%
% within big size and
debt recovery
100.0
% 100.0% 100.0%
% of Total 41.7% 58.3% 100.0%
Source: Primary data, September 2011
Table 4.26 shows that the respondents who agreed on the statement of no correlation
between small size of the board of directors and the debt recovery of MFIs in
Rwanda are 17 (56.7%) out of 30 (100%); and those who agreed on the statement of
no correlation between the big size of board of directors and the debt recovery of
MFIs in Rwanda are 17 (29.3%) out 58 (100%).
127
The respondents who disagreed on the statement of no correlation between small size
of the board of directors and the debt recovery of MFIs were 68 (62.4%) out 109
(100%); and those who disagreed on the statement of no correlation between the big
size of the board of directors and the debt recovery of MFIs in Rwanda were 68
(84%) out 81(100%).
Table 4.26 shows that only 17(12.2%) out of 139 (100%) respondents agreed on the
statement of no correlation between the board size and the sustainability of MFIs as
far as the debt recovery is concerned in Rwanda, while a total of 68(49.8%) out of
139(100%) disagreed on that statement. The remaining were the respondents who did
neither agreed or disagreed on the above mentioned statement. From these opinions
of respondents, one may confirm that respondents think that board size does not
correlate with sustainability of MFIs as far as the debt recovery is concerned in
Rwanda.
Table 4.27: Chi-Square Tests of the board size and the debt recovery
Value df Asymp. Sig.
(2-sided) Exact Sig. (2-sided)
Exact Sig. (1-sided)
Pearson Chi-Square 3.512(b) 1 .061
Continuity
Correction(a) 2.772 1 .096
Likelihood Ratio 3.470 1 .062
Fisher's Exact Test .093 .049
Linear-by-Linear
Association 3.487 1 .062
N of Valid Cases 139
a Computed only for a 2x2 table
Source: Primary data, September 2011
128
In Table 4.27 the calculated Chi-Square value is 3.512 while the critical value is
3.841 at a degree of precision of 95%. Since the calculated value is less than the
critical value, the null hypothesis was accepted. Therefore, this test is not statistically
significant the level of 0.5%, the test would be statistically significant at 10%.
Table 4.28: Size of the board and profitability Crosstabulation
No correlation between big size and
profitability Total
Agree Disagree No correlation between small size and profitability
Agree Count
20 5 25
% within small size and profitability 80.0% 20.0% 100.0%
% within big size and profitability 20.8% 11.6% 18.0%
% of Total 14.4% 3.6% 18.0% Disagree Count 76 38 114 % within small size
and profitability 66.7% 33.3% 100.0%
% within big size and profitability 79.2% 88.4% 82.0%
% of Total 54.7% 27.3% 82.0% Total Count 96 43 139 % within small size
and profitability 69.1% 30.9% 100.0%
% within big size and profitability 100.0% 100.0% 100.0%
% of Total 69.1% 30.9% 100.0%
Source: Primary data, September 2011
Table 4.28 shows that the respondents who agreed on the statement of no correlation
between small size of the board of directors and the profitability of MFIs in Rwanda
were 20 (80%) out of 25 (100%); and those who agreed on the the statement of no
correlation between the big size of board of directors and the profitability of MFIs in
Rwanda were 20(20.8%) out 96 (100%).
129
The respondents who disagreed on the statement of no correlation between small size
of the board of directors and the profitability of MFIs were 38 (33.3%) out 114
(100%); and those who disagreed on the statement of no correlation between the big
size of the board of directors and the debt recovery of MFIs in Rwanda were 38
(84.4%) out 43(100%).
The table 4.28 shows that only 20(14.4%) out of 139 (100%) respondents agreed on
the statement of no correlation between the board size and the impact of MFIs on the
customers living conditions, while a total of 38(27.3%) out of 139(100%) disagreed
on that statement. The remaining were the respondents who did neither agreed or
disagreed on the above mentioned statement. From the respondents’ opinions, one
may confirm that the board size does not correlate with sustainability as far as
profitability of MFIs is concerned in Rwanda.
Table 4.29: Chi-Square Tests of the size of the board and profitability
Value df
Asymp.
Sig. (2-
sided)
Exact
Sig. (2-
sided)
Exact Sig. (1-sided)
Pearson Chi-Square 1.706(b) 1 .191
Continuity Correction(a) 1.139 1 .286
Likelihood Ratio 1.820 1 .177
Fisher's Exact Test .237 .142
Linear-by-Linear
Association 1.694 1 .193
N of Valid Cases 139
a Computed only for a 2x2 table
Source: Primary data, September 2011
130
From Table 4.29 it is observed that the calculated Chi-Square value is 1.706 while
the critical value is 3.841 at a degree of precision of 95%. Since the calculated value
is less than the critical value, the null hypothesis was accepted. Therefore, this test
shows that there is no correlation between the size of the board of directors and the
profitability of MFIs in Rwanda. The test is not statistically significant.
4.4 Board Composition and Performance of MFIs in Rwanda
This section presents the research findings and analysis of data on the correlation
between the board composition and the performance of MFIs in Rwanda. The
section is split into two subsections namely; outsiders and insiders board members;
the correlation of these two characteristics of a board and the performance of MFIs in
Rwanda. The section aims at verifying the second null hypothesis which states as
follows:
Ho (2): There is no correlation between the board composition and the performance of
MFIs in Rwanda
Table 4.30: Frequency on outside/independent/nonexecutive members of the
board and social living conditions
Frequency Percent Valid Percent Cumulative
Percent Valid Strongly agree 6 4.3 4.3 4.3 Agree 14 10.1 10.1 14.4 Neither agree nor
disagree 20 14.4 14.4 28.8
Disagree 56 40.3 40.3 69.1 Strongly disagree 43 30.9 30.9 100.0 Total 139 100.0 100.0
Source: Primary data, September 2011
131
4.4.1 Outsiders’ board members and performance of MFIs
This subsection deals with the research findings and analysis of data related to the
above mentioned second research nil hypotheses
Table 4.30 illustrates that respondents who strongly disagreed on non-executive
members of the board of directors have no correlation with the social living
conditions of the customers of the MFIs represent 43(30.9%) while those who
disagreed represent 56(40.3%). This shows that 99(71.2%) confirmed that the
relationship between non executive members of the board of directors and the social
living conditions of customers of MFIs does exist; this shows to the researcher that
independent members of the board of directors have a correlation with the social
living conditions of the customers of MFIs. The respondents who neither agreed nor
disagreed about no relationship represent 20(14.4%). This means that they didn’t
have any knowledge about the relationship between the non executive members of
the board of directors and the social living conditions of customers of MFIs. The
relationship is also confirmed by a low rate of the respondents who agreed about the
non-relationship between the variables, the respondents represent 14(10.1%) of the
total of respondents. It is also confirmed by those who strongly agreed on no
relationship between the variables because they represent only 6(4.3%) of the total
respondents. From Table 4.30, one may conclude that the majority of the
respondents, representing 71.1%, confirmed that there is a correlation between the
outside members of the board of directors and the social living conditions of the
MFIs in Rwanda. This could be as a result of neutrality in decision making by
outside members. They do not normally have a conflict of interest in companies and
132
normally endeavour to utilise their knowledge, skills, experience and contacts for the
good of a company.
Table 4.31: Frequency on outside/independent/nonexecutive members of the
board and economic living conditions
Frequency Percent
Valid
Percent
Cumulative
Percent
Valid Strongly agree 7 5.0 5.0 5.0
Agree 18 12.9 12.9 18.0
Neither agree nor
disagree 13 9.4 9.4 27.3
Disagree 46 33.1 33.1 60.4
Strongly disagree 55 39.6 39.6 100.0
Total 139 100.0 100.0
Source: Primary data, September 2011
Table 4.31 demonstrates that respondents who strongly disagreed that no-executive
members of the board of directors have no correlation with the economic living
conditions of the customers of the MFIs represent 55(39.6%) while those who agreed
represent 46(33.1%). This shows that 101(72.7%) confirmed that the relationship
between non executive members of the board of directors and the economic living
conditions of customers of MFIs does exist; this shows to the researcher that
independent members of the board of directors have a correlation with the economic
living conditions of the customers of MFIs. The respondents who neither agreed nor
disagreed about that relationship represent only 13(9.4%). This means that they
133
didn’t have any knowledge about the relationship between the non executive
members of the board of directors and the economic living conditions of customers
of MFIs. The is also confirmed by the low rate of the respondents who agreed about
the above mentioned relationship, the respondents represent 18(12.9%) of the total of
respondents. It can be also confirmed by those who strongly agreed about the
relationship because they represent only 7(5%) of the total respondents. From this
Table, one may conclude that the majority of the respondents, representing
101(72.7%), confirmed that there is a strong correlation between the outside
members of the board of directors and the economic living conditions of the MFIs in
Rwanda. This could be as a result of neutralility in decision making by outside
members. They do not normally have a conflict of interest in companies and
normally endeavour to utilise their knowledge, skills, experience and contacts for the
good of a company.
Table 4.32: Frequency on outside/independent/nonexecutive members of the
board and number of customers
Frequency Percent
Valid
Percent
Cumulative
Percent
Valid Strongly agree 4 2.9 2.9 2.9
Agree 16 11.5 11.5 14.4
Neither agree
nor disagree 13 9.4 9.4 23.7
Disagree 51 36.7 36.7 60.4
Strongly
disagree 55 39.6 39.6 100.0
Total 139 100.0 100.0
Source: Primary data, September 2011
134
Table 4.32 shows that respondents who strongly disagreed on non-executive
members of the board of directors had no correlation with the increase of the
customers of the MFIs represent 55(39.6%) while those who disagreed represented
51(36.7%). Surprisingly the same percentage as the relationship between the outsider
members of the board and the economic living conditions of the customers of MFIs.
This shows that 76.3% confirmed that the relationship between non-executive
members of the board of directors and the increase of customers of MFIs does exist.
This shows to the researcher that independent members of the board of directors
have a correlation with the increase of the customers of MFIs. The respondents who
neither agreed nor disagreed about non-relationship represent only 13(9.4%). This
means that they don’t have any knowledge about the relationship between the non-
executive members of the board of directors and the increase of customers of MFIs.
This relationship is also confirmed by the low rate of the respondents who agreed
about non-relationship, the respondents represent 16(11.5%) of the total of
respondents. It is also confirmed by those who strongly agreed about the non-
relationship because they represent only 4(2.9%) of the total respondents. From this
Table, the research concludes that the majority of the respondents, representing
106(76.3%), confirmed that there is a correlation between the outside members of the
board of directors and the increase of the number of customers of the MFIs in
Rwanda. This could be as a result of neutralility in decision making by outside
members. They do not normally have a conflict of interest in companies and
normally endeavour to utilise their knowledge, skills, experience and contacts for the
good of a company.
135
Table 4.33: Frequency on outside/independent/nonexecutive mebers of the
board and number of loans
Frequency Percent
Valid
Percent Cumulative Percent
Valid Strongly agree 11 7.9 7.9 7.9
Agree 7 5.0 5.0 12.9
Neither agree
nor disagree 15 10.8 10.8 23.7
Disagree 51 36.7 36.7 60.4
Strongly
disagree 55 39.6 39.6 100.0
Total 139 100.0 100.0
Source: Primary data, September 2011
Table 4.33 expresses the number of repondents who strongly disagreed that non-
executive members of the board of directors have no correlation with the increase of
loans issued to customers by MFIs represents 55(39.6%) while those who disagreed
represent 51(36.7%). This shows that 106(76.3%) confirmed that the relationship
between non-executive members of the board of directors and the increase of the
loans issued to customers of MFIs does exist; this shows to the researcher that
independent members of the board of directors have a correlation with the increase
of loans issued to customers of MFIs. The respondents who neither agreed nor
disagreed about that relationship represent 15(10.8%). This means that they don’t
have any knowledge about the relationship between the non-executive members of
136
the board of directors and the increase of loans issued to customers of MFIs. The
non relationship is confirmed by a low rate of the respondents who agreed about the
above mentioned relationship, they represent only 7(5%) of the total of respondents.
It is also confirmed by those who strongly agreed about the no relationship because
they represent 11(7.9%) of the total respondents. From this Table, one may conclude
that the majority of the respondents, representing 106(76.3%), confirmed that there is
a correlation between the outside members of the board of directors and the increase
of loans issued to customers of the MFIs in Rwanda. This could be as a result of
neutralility in decision making by outside members. They normally do not have any
conflict of interest in companies and endeavour to utilise their knowledge, skills,
experience and contacts for the good of a company.
Table 4.34: Frequency on outside/independent/nonexecutive members of the
board and debt recovery
Frequency Percent
Valid
Percent Cumulative Percent
Valid Strongly agree 6 4.3 4.3 4.3
Agree 14 10.1 10.1 14.4
Neither agree
nor disagree 12 8.6 8.6 23.0
Disagree 44 31.7 31.7 54.7
Strongly
disagree 63 45.3 45.3 100.0
Total 139 100.0 100.0
Source: Primary data, September 2011
137
Table 4.34 shows that repondents who strongly disagreed that non-executive
members of the board of directors have no correlation with the debt recovery
represent 63(45.3%) while those who disagreed on no correlation represent
44(31.7%). This shows that 107(77%) confirmed that the relationship between non-
executive members of the board of directors and the debt recovery of MFIs does
exist. This shows to the researcher that independent members of the board of
directors have a correlation with the social living conditions of the customers of
MFIs. The respondents who neither agreed nor disagreed about the non-relationship
between outsider board members and the debt recovery represent 12(8.6%). This
means that they don’t have any knowledge about the relationship between the non-
executive members of the board of directors and the debt recovery of MFIs.
The non-relationship is also confirmed by a low rate of the respondents who agreed
about it, the respondents represent 14(10.1%) of the total of respondents. The non-
relationship is also confirmed by those who strongly agreed about it because they
represent only 6(4.3%) of the total respondents. From this Table, one may conclude
that the majority of the respondents, representing 107(77%), confirmed that there is a
correlation between the outside members of the board of directors and the debt
recovery of the MFIs in Rwanda. This could be as a result of neutralility in decision
making by outside members. They do not normally have any conflict of interest in
companies and normally endeavour to utilise their knowledge, skills, experience and
contacts for the good of a company.
138
Table 4.35: Frequency on outside/independent/nonexecutive members of the
board and profitability
Frequency Percent
Valid
Percent
Cumulative
Percent
Valid Strongly agree 7 5.0 5.0 5.0
Agree 14 10.1 10.1 15.1
Neither agree nor
disagree 14 10.1 10.1 25.2
Disagree 40 28.8 28.8 54.0
Strongly disagree 64 46.0 46.0 100.0
Total 139 100.0 100.0
Source: Primary data, September 2011
Table 4.35 demonstrates that respondents who strongly disagreed on non-executive
members of the board of directors have no correlation with the profitability of the
MFIs represent 64(46%) while those who disagreed represent 40(28.8%). This
shows that 104(74.8%) confirmed that the relationship between non-executive
members of the board of directors and the profitability of MFIs does exist. This
shows to the researcher that independent members of the board of directors have a
correlation with the profitability of MFIs. The respondents who neither agreed nor
disagreed about that non-relationship represent 14(10.1%). This means that they
don’t have any knowledge about the relationship between the non-executive
members of the board of directors and the profitability of MFIs. The non-
relationship is also confirmed by a low rate of the respondents who agreed about it
who the respondents represent 14(10.1%) of the total of respondents. It is also
139
confirmed by those who strongly agreed about the relationship because they
represent only 7(5%) of the total respondents. From this Table, one may conclude
that the majority of the respondents, representing 104(74.8%), confirmed that there is
a correlation between the outside members of the board of directors on the
profitability of the MFIs in Rwanda. This could be as a result of neutralility in
decision making by outside members. They do not normally have any conflict of
interest in companies and normally endeavour to utilise their knowledge, skills,
experience and contacts for the good of a company.
4.4.3 Insiders’ board members and performance of MFIs
This subsection deals with the research findings and analysis of data related to the
second null hypothesis as stated in the section 4.4.
Table 4.36: Frequency on inside/non independent/executive and social living
conditions
Frequency Percent
Valid
Percent
Cumulative
Percent
Valid Strongly agree 3 2.2 2.2 2.2
Agree 12 8.6 8.6 10.8
Neither agree
nor disagree 34 24.5 24.5 35.3
Disagree 67 48.2 48.2 83.5
Strongly
disagree 23 16.5 16.5 100.0
Total 139 100.0 100.0
Source: Primary data, September 2011
140
Table 4.36 illustrates that respondents who strongly disagreed that executive
members of the board of directors have a positive correlation with the social living
conditions of the MFIs represent only 23(16.5%) while those who disagreed
represent 67(48.2%). This displays that 90(64.7%) confirmed that the relationship
does exist; this shows to the researcher that the executive members of the board of
directors have a correlation with the social living conditions of customers of the
MFIs. Surprisingly, the respondents who neither agreed nor disagreed about that
relationship represent 34(24.5%). This means that they don’t have any knowledge
about the non-relationship between the executive members of board of directors and
the social living conditions of customers of MFIs in Rwanda. The respondents who
agreed about the non-relationship between executive members of the board of
directors and the social living conditions of the customers of the MFIs represent
12(8.6%).
Those who strongly agreed about the above mentioned non-relationship represent
3(2.2%) only. From this table, one may conclude that the majority of the
respondents, representing 90(64.7%), confirmed that the executive members of the
board of directors have a correlation with the social living conditions of customers of
MFIs in Rwanda. One of the reasons could be that as insiders, these board members
have a lot of knowledge and experience about the company that could be useful in
increasing the level of performance of companies for the benefit of customers.
141
Table 4.37: Frequency on inside/non independent/executive and economic living
conditions
Frequency Percent
Valid
Percent
Cumulative
Percent
Valid Strongly agree 2 1.4 1.4 1.4
Agree 13 9.4 9.4 10.8
Neither agree nor
disagree 34 24.5 24.5 35.3
Disagree 72 51.8 51.8 87.1
Strongly disagree 18 12.9 12.9 100.0
Total 139 100.0 100.0
Source: Primary data, September 2011
Table 4.37 clearly illustrates that the number of respondents who strongly disagreed
that executive members of the board of directors have no correlation with the
economic living conditions of the MFIs represent only 18(12.9%) while those who
disagreed represent 72(51.8%). This displays that 90(64.7%) confirmed that the
relationship does exist; this shows to the researcher that the executive/insider/non
independent members of the board of directors have positive correlation with the
economic living conditions of customers of the MFIs. Surprisingly, the respondents
who neither agreed nor disagreed about that relationship represent 34(24.5%), this
percentage is higher than the one of those who strongly agree about that relationship.
This means that they don’t have any knowledge about the relationship between the
executive/insider/non independent members of board of directors and the economic
142
living conditions of customers of MFIs in Rwanda. The respondents who agreed
about the non-relationship between executive/insider/non independent executive
members of the board of directors and the economic living conditions of the
customers of the MFIs represent 13(9.4%). Those who strongly agreed about the
above mentioned non-relationship represent 2(1.4%) only. From this table, one may
conclude that the majority of the respondents, representing 90(64.7%), confirmed
that the executive/insider/non independent members of the board of directors have
correlation with the economic living conditions of customers of MFIs in Rwanda.
One of the reasons could be that as insiders, these board members have a lot of
knowledge and experience about the company that could be useful in increasing the
level of performance of companies for the benefit of customers.
Table 4.38: Frequency on inside/non independent/executive and number of
customers
Frequency Percent
Valid
Percent
Cumulative
Percent
Valid Strongly agree 2 1.4 1.4 1.4
Agree 14 10.1 10.1 11.5
Neither agree nor
disagree 36 25.9 25.9 37.4
Disagree 63 45.3 45.3 82.7
Strongly disagree 24 17.3 17.3 100.0
Total 139 100.0 100.0
Source: Primary data, September 2011
143
Table 4.38 demonstrates that respondents who strongly agreed that
executive/insider/non independent members of the board of directors have a positive
correlation with the increase of the number of customers of MFIs represent only
24(17.3%). Those who agreed about that relationship represent 63(45.3%). This
displays that 87(62.6%) confirmed that the relationship does exist; this shows to the
researcher that the executive/insider/independent members of the board of directors
have positive correlation with the increase of the number of customers of MFIs. The
Table shows that the respondents who neither agreed nor disagreed about that
relationship represent 36(25.9%); the percentage is greater that the one of those who
strongly agreed about that relationship. This means that 36(25.9%) of the
respondents have no any knowledge about the relationship between the
executive/insider/independent members of board of directors and the increase of the
number of customers of MFIs in Rwanda. The respondents who disagreed about the
relationship between the executive/insider/independent members of the board of
directors and the increase of the number of customers of MFIs represent 14(10.1%).
Those who strongly disagreed about the above mentioned relationship represent
2(1.4%) only. From this Table, the research concludes that the majority of the
respondents, representing 87(62.6%), confirmed that the executive/ insider/
independent members of the board of directors have positive correlation with the
increase of the number of customers of MFIs in Rwanda. One of the reasons could
be that as insiders, these board members have a lot of knowledge and experience
about the company that could be useful in increasing the level of performance of
companies for the benefit of customers.
144
Table 4.39: Frequency on inside/non independent/executive and number of
loans
Frequency Percent
Valid
Percent
Cumulative
Percent
Valid Strongly agree 3 2.2 2.2 2.2
Agree 14 10.1 10.1 12.2
Neither agree
nor disagree 24 17.3 17.3 29.5
Disagree 73 52.5 52.5 82.0
Strongly
disagree 25 18.0 18.0 100.0
Total 139 100.0 100.0
Source: Primary data, September 2011
Table 4.39 illustrates that the number of respondents who strongly disagreed that
executive/insider/non independent members of the board of directors have no
correlation with the increase of the number of loans issued by MFIs represent only
25(18%) while those who disagreed represent 73(52.5%). The table displays that
98(70.5%) confirmed that the relationship exists; this shows to the researcher that the
executive/insider/non-independent members of the board of directors have a
correlation with the increase of the number of loans issued to customers by MFIs.
The percentage of the respondents who neither agreed nor disagreed about that non-
relationship is 24(17.3%). This means that they didn’t have any knowledge about the
relationship between the executive/insider/non independent members of board of
directors and the increase of the number of loans issued to customers by MFIs in
145
Rwanda. The respondents who agreed about the non-relationship between
executive/insider/non independent members of the board of directors and the
increase of the number of loans issued to customers by MFIs represent 14(10.1%).
The respondents who strongly agreed about the above mentioned relationship
represented 3(2.2%) only. From this table, the conclusion is that the majority of the
respondents, representing 98(70.5%), confirmed that the executive/insider/non
independent members of the board of directors have a correlation with the increase
of the number of loans issued to customers by MFIs in Rwanda. One of the reasons
could be that as insiders, these board members have a lot of knowledge and
experience about the company that could be useful in increasing the level of
performance of companies for the benefit of customers. There could also be
acquaintance between customers and inside board members.
Table 4.40: Frequency on inside/non independent/executive and debt recovery
Frequency Percent
Valid
Percent
Cumulative
Percent
Valid Strongly agree 1 .7 .7 .7
Agree 18 12.9 12.9 13.7
Neither agree nor
disagree 20 14.4 14.4 28.1
Disagree 78 56.1 56.1 84.2
Strongly disagree 22 15.8 15.8 100.0
Total 139 100.0 100.0
Source: Primary data, September 2011
Table 4.40 above illustrates that respondents who strongly disagreed that
executive/insider/non independent members of the board of directors have a no
146
correlation with the debt recovery by MFIs represent only 22(15.8%) while those
who disagreed represent 78(56.1%). This displays that 100(71.9%) confirmed that
the relationship does exist; this shows to the researcher that the executive/insider/non
independent members of the board of directors have positive correlation with the
debt recovery by MFIs. The percent of the respondents who neither agreed nor
disagreed about that relationship represent 20(14.4%). This means that these
respondents 20(14.4%) don’t have any knowledge about the non-relationship
between the executive/insider/non independent members of board of directors and
the debt recovery by MFIs in Rwanda. The respondents who agreed about the
relationship between executive/insider/non independent members of the board of
directors and the debt recovery by MFIs represent 18(12.9%).
Only one respondent strongly agreed about the above mentioned non-relationship
represent less than 1 (0.7%) only. From this table, the conclusion may be that the
majority of the respondents, representing 71.9%, confirmed that the
executive/insider/non independent members of the board of directors have a
correlation with the debt recovery by the MFIs in Rwanda. One of the reasons could
be that as insiders, these board members have a lot of knowledge and experience
about the company that could be useful in increasing the level of performance of
companies for the benefit of customers. There could also be acquaintance between
customers and inside board members.
Most of the time the inside directors align themselves to the CEO Roselina (2007);
the author said that the CEO has a full power on inside board members for
sometimes the CEO contributes in appointing them, this may lead to inside board
147
members to remain loyal to the CEO. Due to their implicit relationship with the
CEO, inside directors may not contribute towards effective monitoring of the CEO.
Therefore boards with more executive directors do not lead to enhancing firm
performance.
Table 4.41: Frequency on inside/non independent/executive and profitability
Frequency Percent
Valid
Percent Cumulative Percent
Valid Strongly agree 1 .7 .7 .7
Agree 13 9.4 9.4 10.1
Neither agree
nor disagree 23 16.5 16.5 26.6
Disagree 72 51.8 51.8 78.4
Strongly
disagree 30 21.6 21.6 100.0
Total 139 100.0 100.0
Source: Primary data, September 2011
Table 4.41 illustrates that respondents who strongly disagreed that
executive/insider/non independent members of the board of directors have no
correlation with the profitability of the MFIs represent only 30(21.6%) while those
who disagreed represent 72(51.8%). This displays that 102(73.4%) confirmed that
the relationship does exist; this shows to the researcher that the executive/insider/non
independent members of the board of directors have a correlation with the
profitability of the MFIs. The rate of the respondents who neither agreed nor
disagreed about the non-relationship is 23(16.5%); this means that this percent
represents the respondents who don’t have any knowledge about the relationship
between the executive/insider/non independent members of board of directors and
148
the profitability of the MFIs in Rwanda. The respondents who agreed about the non-
relationship between executive / insider/ non-independent members of the board of
directors and the profitability of the MFIs represent 13(9.4%). Only 1(0.7%)
respondent strongly agreed about the above mentioned relationship. From the table
above, the conclusion the researcher can draw is that the majority of the respondents,
representing 102(73.4%), confirmed that the executive /insider/non independent
members of the board of directors have a correlation with the profitability of the
MFIs in Rwanda. One of the reasons could be that as insiders, these board members
have a lot of knowledge and experience about the company that could be useful in
increasing the level of performance of companies in terms of profitability.
4.4.3 Testing the hypothesis number two
This subsection aims at testing the second hypothesis which states as follows; there
is correlation between the board composition and the performance of MFIs in
Rwanda.
As the crosstabulation method was to get opinions from respondents on the non-
correlation between the board composition, as one of the variables of corporate
governance, and the ones of the performance of MFIs in Rwanda; the researcher
crosstabulated those various variables to find out their opinions.
Table 4.42 shows that the respondents who agreed on the statement that there is no
correlation between outsiders’ board members and the social living conditions of
MFIs’ customers in Rwanda were 20 (50%) out of 40 (100%); and those who agreed
on the statement of no correlation between insiders’ board members and the social
living conditions of MFIs’ customers in Rwanda were 20(40.8%) out 49 (100%).
149
Table 4.42: Board composition and social living conditions Crosstabulation
No correlation
between insiders
and social living
conditions
Total Agree Disagree
No correlation
between outsiders
and social living
conditions
Agree Count 20 20 40
% within outsiders
and social living
conditions
50.0% 50.0% 100.0%
% within insiders
and social living
conditions
40.8% 22.2% 28.8%
% of Total 14.4% 14.4% 28.8%
Disagre
e
Count 29 70 99
% within outsiders
and social living
conditions
29.3% 70.7% 100.0%
% within insiders
and social living
conditions
59.2% 77.8% 71.2%
% of Total 20.9% 50.4% 71.2%
Total Count 49 90 139
% within outsiders
and social living
conditions
35.3% 64.7% 100.0%
% within insiders
and social living
conditions
100.0% 100.0% 100.0%
% of Total 35.3% 64.7% 100.0%
Source: Primary data, September 2011
150
The respondents who disagreed on the statement of no correlation between outsiders’
board members and the social living conditions of MFIs’ customers are 70 (70.7%)
out 99 (100%); and those who disagreed on the statement of no correlation between
insiders’ board members and the social living conditions of MFIs’ customers in
Rwanda are 70 (77.8%) out 90(100%).
Table 4.42 shows that only 20(14.4%) out of 139 (100%) respondents agreed on the
statement of no correlation between the board composition and the impact of MFIs
on the customers social living conditions, while a total of 70(50.4%) out of
139(100%) disagreed on that statement. The remaining were the respondents who did
neither agreed or disagreed on the above mentioned statement. These respondents’
opinions show that there might be a correlation between the board composition and
the impact of MFIs as far as the social living conditions of MFIs’ customers are
concerned in Rwanda.
Table 4.43: Chi-Square Tests of the correlation between board composition and
the social living conditions
Value df
Asymp.
Sig. (2-
sided)
Exact Sig.
(2-sided)
Exact Sig.
(1-sided)
Pearson Chi-Square 5.352(b) 1 .021 Continuity Correction(a) 4.483 1 .034 Likelihood Ratio 5.227 1 .022 Fisher's Exact Test .030 .018 Linear-by-Linear Association 5.313 1 .021
N of Valid Cases 139 a Computed only for a 2x2 table
Source: Primary data, September 2011
151
Table 4.43 displays the calculated Chi-Square value of 5.352 while the critical value
is 3.841 at a degree of precision of 95%. Since the calculated value is greater than the
critical value, the sub null hypothesis was rejected. Therefore, this test shows that
there is a correlation between the board composition and the social living conditions
of MFIs’ customers in Rwanda. This test is statistically significant.
Table 4.44: Board composition and economic living conditions Cross tabulation
No correlation between insiders
and economic living conditions Total
Agree Disagree No correlation between outsiders and economic living conditions
Agree Count
15 23 38
% within outsiders and economic living conditions
39.5% 60.5% 100.0%
% within insiders and economic living conditions
30.6% 25.6% 27.3%
% of Total 10.8% 16.5% 27.3% Disagree Count 34 67 101 % within outsiders
and economic living conditions
33.7% 66.3% 100.0%
% within insiders and economic living conditions
69.4% 74.4% 72.7%
% of Total 24.5% 48.2% 72.7% Total Count 49 90 139 % within outsiders
and economic living conditions
35.3% 64.7% 100.0%
% within insiders and economic living conditions
100.0% 100.0% 100.0%
% of Total 35.3% 64.7% 100.0% Source: Primary data, September 2011
152
Table 4.44 shows that the respondents who agreed on the statement of no correlation
between outsiders’ board members and the economic living conditions of MFIs’
customers in Rwanda are 15 (39.5%) out of 38 (100%); and those who agreed on the
statement of no correlation between insiders’ board members and the economic
living conditions of MFIs’ customers in Rwanda are 15(30.6%) out 49 (100%).
The respondents who disagreed on the statement of no correlation between outsiders’
board members and the economic living conditions of MFIs’ customers are 67
(66.3%) out 101 (100%); and those who disagreed on the statement of no correlation
between insiders’ board members and the economic living conditions of MFIs’
customers in Rwanda are 67 (74.4%) out 90(100%).
Table 4.44 shows that only 15(10.8%) out of 139 (100%) respondents agreed on the
statement of no correlation between the board composition and the impact of MFIs
on the customers social living conditions, while a total of 67(48.2%) out of
139(100%) disagreed on that statement. The remaining were the respondents who did
neither agreed or disagreed on the above mentioned statement.
These respondents’ views show that there might not be any correlation between the
board composition and the impact of MFIs as far as the social living conditions of
MFIs’ customers are concerned in Rwanda.
153
Table 4.45: Chi-Square Tests of the correlation between the board composition
and economic living conditions
Value df
Asymp. Sig.
(2-sided)
Exact Sig.
(2-sided)
Exact Sig.
(1-sided)
Pearson Chi-
Square .408(b) 1 .523
Continuity
Correction(a) .194 1 .660
Likelihood Ratio .404 1 .525
Fisher's Exact
Test .554 .328
Linear-by-Linear
Association .405 1 .524
N of Valid Cases 139
a Computed only for a 2x2 table
Source: Primary data, September 2011
Table 4.45 displays the calculated Chi-Square value of .408 while the critical value is
3.841 at a degree of precision of 95%. Since the calculated value is less than the
critical value, the null hypothesis was accepted. Therefore, this test shows that there
is no correlation between the board composition and the economic living conditions
of MFIs’ customers in Rwanda. This test is not statistically significant.
154
Table 4.46: Board composition and number of customers Crosstabulation
No correlation between insiders and number of
customers Total Agree Disagree
No correlation
between outsiders
and number of
customers
Agree Count
16 17 33
% within outsiders and
number of customers 48.5% 51.5% 100.0%
% within insiders and
number of customers 30.8% 19.5% 23.7%
% of Total 11.5% 12.2% 23.7%
Disagree Count 36 70 106
% within outsiders and
number of customers 34.0% 66.0% 100.0%
% within insiders and
number of customers 69.2% 80.5% 76.3%
% of Total 25.9% 50.4% 76.3%
Total Count 52 87 139
% within outsiders and
number of customers 37.4% 62.6% 100.0%
% within insiders and
number of customers
100.0
% 100.0% 100.0%
% of Total 37.4% 62.6% 100.0%
Source: Primary data, September 2011
Table 4.46 shows that the respondents who agreed on the statement of non-
correlation between outsiders’ board members and the increase of MFIs’ customers
in Rwanda were 16(48.5%) out of 33 (100%); and those who agreed on the statement
155
of no correlation between insiders’ board members and the increase of MFIs’
customers in Rwanda were 16(30.8%) out 52 (100%). The respondents who
disagreed on the statement of no correlation between outsiders’ board members and
the increase of MFIs’ customers were 70 (66%) out 106 (100%); and those who
disagreed on the statement of no correlation between insiders’ board members and
the increase of MFIs’ customers in Rwanda were 70 (80.5%) out 87(100%).
Table 4.46 shows that only 16(11.5%) out of 139 (100%) respondents agreed on the
statement of no correlation between the board composition and the outreach of MFIs
as far the increase of the number of customers is concerned, while a total of
70(50.4%) out of 139(100%) disagreed on that statement. The remaining were the
respondents who did neither agreed or disagreed on the above mentioned statement.
From these opinions, one may think that there might not be a correlation between the
board composition and the outreach of MFIs as far as the increase of MFIs’
customers is concerned in Rwanda.
Table 4.47: Chi-Square Tests of the correlation between the board composition
and the number of customers
Value df
Asymp. Sig.
(2-sided)
Exact Sig.
(2-sided)
Exact Sig.
(1-sided)
Pearson Chi-Square 2.267(b) 1 .132 Continuity Correction(a) 1.689 1 .194
Likelihood Ratio 2.223 1 .136 Fisher's Exact Test .152 .098 Linear-by-Linear Association 2.250 1 .134
N of Valid Cases 139 a Computed only for a 2x2 table Source: Primary data, September 2011
156
Table 4.47 displays the calculated Chi-Square value of 2.267; while the critical value
is 3.841 at a degree of precision of 95%. Since the calculated value is less than the
critical value, the null hypothesis was accepted. Therefore, this test shows that there
is no correlation between the board composition and the increase of MFIs’ customers
in Rwanda. This test is not statistically significant.
Table 4.48: Board composition and number of loans Crosstabulation
No correlation between insiders and number of
loans Total
Agree Disagree No correlation between outsiders and number of loans
Agree Count
17 16 33
% within outsiders and number of loans
51.5% 48.5% 100.0%
% within insiders and number of loans
41.5% 16.3% 23.7%
% of Total 12.2% 11.5% 23.7% Disagree Count 24 82 106 % within
outsiders and number of loans
22.6% 77.4% 100.0%
% within insiders and number of loans
58.5% 83.7% 76.3%
% of Total 17.3% 59.0% 76.3% Total Count 41 98 139 % within
outsiders and number of loans
29.5% 70.5% 100.0%
% within insiders and number of loans
100.0% 100.0% 100.0%
% of Total 29.5% 70.5% 100.0%
Source: Primary data, September 2011
157
Table 4.48 shows that the respondents who agreed on the statement of no correlation
between outsiders’ board members and the increase of number of loans to MFIs’
customers in Rwanda were 17 (51.5%) out of 33 (100%); and those who agreed on
the statement of no correlation between insiders’ board members and the increase of
loans to MFIs’ customers in Rwanda were17 (41.5%) out 41 (100%).
The respondents who disagreed on the statement of no correlation between outsiders’
board members and the increase of number of loans to MFIs’ customers are 82
(77.4%) out 106 (100%); and those who disagreed on the statement of no correlation
between insiders’ board members and the increase of number of loans to MFIs’
customers in Rwanda are 82 (83.7%) out 98(100%).
Table 4.55 shows that only 17(12.2%) out of 139 (100%) respondents agreed on the
statement of no correlation between the board composition and the outreach of MFIs
as far the increase of the number of loans issued to customers is concerned, while a
total of 82(59%) out of 139(100%) disagreed on that statement. The remaining were
the respondents who did neither agreed or disagreed on the above mentioned
statement.
From these opinions, one may think that there might be a correlation between the
board composition and the outreach of MFIs as far as the increase of the number of
loans issued to customers is concerned in Rwanda.
158
Table 4.49: Chi-Square Tests of the correlation between the board composition
and the number of loans
Value df
Asymp. Sig.
(2-sided)
Exact Sig.
(2-sided)
Exact Sig. (1-
sided)
Pearson Chi-
Square 10.089(b) 1 .001
Continuity
Correction(a) 8.748 1 .003
Likelihood Ratio 9.499 1 .002
Fisher's Exact
Test .002 .002
Linear-by-Linear
Association 10.016 1 .002
N of Valid Cases 139
a Computed only for a 2x2 table
Source: Primary data, September 2011
Table 4.49 shows the calculated Chi-Square value of 10.089 while the critical value
is 3.841 at a degree of precision of 95%. Since the calculated value is greater than the
critical value, the null hypothesis was rejected. Therefore, this test shows that there is
a correlation between the board composition and the increase of number of loans to
MFIs’ customers in Rwanda. This test is statistically significant.
159
Table 4.50: Board composition and debt recovery Crosstabulation
No correlation between insiders
and debt recovery
Total
Agree Disagree
No correlation
between
outsiders and
debt recovery
Agree Count
32 0 32
% within outsiders and
debt recovery
100.0
% .0% 100.0%
% within insiders and
debt recovery
100.0
% .0% 23.0%
% of Total 23.0% .0% 23.0%
Disagree Count 0 107 107
% within outsiders and
debt recovery .0% 100.0% 100.0%
% within insiders and
debt recovery .0% 100.0% 77.0%
% of Total .0% 77.0% 77.0%
Total Count 32 107 139
% within outsiders and
debt recovery 23.0% 77.0% 100.0%
% within insiders and
debt recovery
100.0
% 100.0% 100.0%
% of Total 23.0% 77.0% 100.0%
Source: Primary data, September 2011
Table 4.50 shows that the respondents who agreed on the statement of no correlation
between outsiders’ board members and the debt recovery of MFIs in Rwanda were
32 (100%) out of 32 (100%); and those who agreed on the statement of no
160
correlation between insiders’ board members and the debt recover of MFIs in
Rwanda were 32(100%) out 32 (100%). The respondents who disagreed on the
statement of no correlation between outsiders’ board members and the debt recovery
of MFIs are 107 (100%) out 107 (100%); and those who disagreed on the statement
of no correlation between insiders’ board members and the debt recovery of MFIs in
Rwanda are 107 (100%) out 107(100%).
Table 4.50 shows that 32(23%) out of 139 (100%) respondents agreed on the
statement of no correlation between the board composition and the sustainability of
MFIs as far as the debt recovery of MFIs is concerned, while a total of 107(77%) out
of 139(100%) disagreed on that statement. The remaining were the respondents who
did neither agreed or disagreed on the above mentioned statement. From these
opinions, one may think that there might be a correlation between the board
composition and the sustainability of MFIs as far as the debt recovery is concerned in
Rwanda.
Table 4.51: Chi-Square Tests of the correlation between the board composition and the debt recovery
Value df
Asymp. Sig.
(2-sided)
Exact Sig.
(2-sided)
Exact Sig. (1-
sided)
Pearson Chi-Square 139.000(b) 1 .000 Continuity Correction(a) 133.414 1 .000
Likelihood Ratio 149.991 1 .000 Fisher's Exact Test .000 .000 Linear-by-Linear Association 138.000 1 .000
N of Valid Cases 139 a Computed only for a 2x2 table
Source: Primary data, September 2011
161
Table 4.51 displays the calculated Chi-Square value of 139.000 while the critical
value is 3.841 at a degree of precision of 95%. Since the calculated value is greater
than the critical value, the null hypothesis was rejected. Therefore, this test shows
that there is a correlation between the board composition and the debt recovery of
MFIs in Rwanda. This test is statistically significant.
Table 4.52: Board composition and profitability Crosstabulation
No correlation between insiders and profitability Total
Agree Disagree No correlation between outsiders and profitability
Agree Count
35 0 35
% within outsiders and profitability 100.0% .0% 100.0%
% within insiders and profitability 100.0% .0% 25.2%
% of Total 25.2% .0% 25.2% Disagree Count 0 104 104 % within outsiders
and profitability .0% 100.0% 100.0%
% within insiders and profitability .0% 100.0% 74.8%
% of Total .0% 74.8% 74.8% Total Count 35 104 139 % within outsiders
and profitability 25.2% 74.8% 100.0%
% within insiders and profitability 100.0% 100.0% 100.0%
% of Total 25.2% 74.8% 100.0%
Source: Primary data, September 2011 Table 4.52 shows that the respondents who agreed on the statement of no correlation
between outsiders’ board members and the profitability of MFIs in Rwanda were 35
(100%) out of 35 (100%); and those who agreed on the statement of no correlation
162
between insiders’ board members and the profitability of MFIs in Rwanda were
20(40.8%) out 49 (100%).
The respondents who disagreed on the statement of no correlation between outsiders’
board members and the profitability of MFIs in Rwanda are 104 (100%) out 104
(100%); and those who disagreed on the statement of no correlation between
insiders’ board members and the profitability of MFIs in Rwanda are 104 (100%) out
104(100%).
Table 4.52 shows that 35(25.2%) out of 139 (100%) respondents agreed on the
statement of no correlation between the board composition and the sustainability of
MFIs as far as the profitability of MFIs is concerned, while a total of 104(74.8%) out
of 139(100%) disagreed on that statement. The remaining were the respondents who
did neither agreed or disagreed with the above mentioned statement. From these
respondents’ opinions, one may think that there might be a correlation between the
board composition and the sustainability of MFIs as far as the profitability is
concerned in Rwanda.
Table 4.53: Chi-Square Tests of the correlation between the board composition
and the profitability
Value df Asymp. Sig.
(2-sided) Exact Sig. (2-sided)
Exact Sig. (1-sided)
Pearson Chi-Square 139.000(b) 1 .000 Continuity Correction(a) 133.743 1 .000
Likelihood Ratio 156.876 1 .000 Fisher's Exact Test .000 .000 Linear-by-Linear Association 138.000 1 .000
N of Valid Cases 139 a Computed only for a 2x2 table
Source: Primary data, September 2011
163
The Table 4.53 displays the calculated Chi-Square value of 139.000 while the critical
value is 3.841 at a degree of precision of 95%. Since the calculated value is greater
than the critical value, the null hypothesis was rejected. Therefore, this test shows
that there is a correlation between the board composition and the profitability of
MFIs in Rwanda. This test is statistically significant.
4.5 Supervision and Performance of MFIs in Rwanda
The section presents research findings and analysis of data on the correlation
between independent audit and the performance of MFIs in Rwanda; in addition to
that the section presents also the research findings and analysis of data on the
correlation between the internal audit and the performance of MFIs in Rwanda. This
means that the supervision was analysed through two major supervision mechanisms;
namely, external audit and the internal audit. This section deals with the fourth
hypothesis which is:
Ho (3): There is no correlation between the supervision and the performance of
microfinance institutions in Rwanda.
4.5.1 Independent audit and performance of MFIs
Independent or external auditors are accountants from outside the firms, who review
the firm’s financial statements and its procedures for producing them (Kenneth,
2010). Their job is to attest the fairness of the statements and that they materially
represent the condition of the firm. The external auditors assess the system and
procedures used by internal auditors. Because external auditors are independent from
the firm being audited and because their explicit job is to check for financial
164
misstatements and adhere to the GAAP, it is they who must ensure the accuracy of
the firm’s financial information to the shareholders (Kenneth, 2010). By their
independence from the CEO, their contribution to the monitoring of the CEO as far
as agency problem is concerned is very crucial. This subsection deals with the research findings and analysis of data related to the fourth nil hypothesis. Following are tables showing the research findings and analysis of data on the
relationship independent auditing and the performance of MFIs in Rwanda.
Table 4. 54 : Frequency on independent auditing and social living conditions
Frequency Percent Valid
Percent Cumulative
Percent Valid Strongly agree 5 3.6 3.6 3.6
Agree 14 10.1 10.1 13.7
Neither agree nor
disagree 11 7.9 7.9 21.6
Disagree 45 32.4 32.4 54.0
Strongly disagree 64 46.0 46.0 100.0
Total 139 100.0 100.0
Source: Primary data, September 2011
Table 4.54 illustrates that 64(46%) respondents who strongly disagreed on the
independent auditors have no correlation with the social living conditions of
customers of the MFIs. While those who disagreed were 45(32.4%). This means that
109(78.4%) confirmed that the relationship does exist. This shows to the researcher
that independent auditors have a correlation with the social living conditions of
customers of the MFIs. The percent of the respondents who neither agreed nor
disagreed about that non-relationship were only 11(7.9%). This means that they
didn’t have any knowledge about the non-relationship between the independent
165
auditors and the social living conditions of customers of the MFIs in Rwanda. This
is somehow confirmed by the percent of the respondents who agreed about the above
mentioned non-relationship; these respondents represent 14(10.1%) of the total of
respondents. Those who strongly disagreed about the non-relationship, they represent
5(3.6%). From this Table, the researcher concludes that the majority of the
respondents, representing 109(78.4%), confirmed that the independent auditors have
a correlation with the social living conditions of customers of the MFIs in Rwanda.
One of the reasons could be due to what external auditors do i.e. pointing out
shortcomings which board and management should address to improve performance
of a company. Some of the improvements include cutting expenses, increasing sales
etc. those measures normally improve what customers get from the company i.e.
lower prices and high quality of goods.
Table 4.55: Frequency on independent auditing and economic living conditions
Frequency Percent Valid
Percent Cumulative
Percent Valid Strongly agree 9 6.5 6.5 6.5 Agree 9 6.5 6.5 12.9 Neither agree
nor disagree 11 7.9 7.9 20.9
Disagree 47 33.8 33.8 54.7 Strongly
disagree 63 45.3 45.3 100.0
Total 139 100.0 100.0
Source: Primary data, September 2011
Table 4.55 illustrates clearly that respondents who strongly disagreed on that
independent auditors have no correlation with the economic living conditions of
customers of the MFIs represent 63(45.3%) while those who agreed represented
47(33.8%). This displays that 110(79.1%) confirmed that the relationship does exist;
166
this shows to the researcher that independent auditors a correlation with the
economic living conditions of customers of the MFIs. The percent of the respondents
who neither agreed nor disagreed about that relationship represent only 11(7.9%).
This means that they didn’t have any knowledge about the non-relationship between
the independent auditors and the social living conditions of customers of the MFIs in
Rwanda. This is somehow confirmed by the percent of the respondents who agreed
about the above mentioned non-relationship; these respondents represent only
9(6.5%) of the total of respondents. Those who strongly agreed about the
relationship, they represent also 9(6.5%). From this table, the researcher may
conclude that the majority of the respondents, representing 110(79.1%), confirmed
that the independent auditors have correlation with the economic living conditions of
customers of the MFIs in Rwanda. One of the reasons could be due to what external
auditors do i.e. pointing out shortcomings which board and management should
address to improve performance of a company. Some of the improvements include
cutting expenses, increasing sales etc. those measures normally improve what
customers get from the company i.e. lower prices and high quality of goods.
Table 4.56: Frequency on independent auditing and number of customers
Frequency Percent Valid
Percent Cumulative Percent Valid Strongly agree 10 7.2 7.2 7.2 Agree 15 10.8 10.8 18.0 Neither agree
nor disagree 15 10.8 10.8 28.8
Disagree 41 29.5 29.5 58.3 Strongly
disagree 58 41.7 41.7 100.0
Total 139 100.0 100.0
Source: Primary data, September 2011
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The Table 4.56 illustrates that respondents who strongly disagreed up on that
independent auditors have no correlation with the increase of the number of
customers of the MFIs represent 58(41.7%) while those who disagreed represent
41(29.5%). This displays a total of 99(72.2%) of the respondents who confirmed
that the relationship does exist; this shows to the researcher that independent auditors
have a correlation with the increase of the number of customers of the MFIs. The
percent of the respondents who neither agreed nor disagreed about that non-
relationship represent 15(10.8%). This means that they don’t have any knowledge
about the non-relationship between the independent auditors and the increase of the
number of customers of the MFIs in Rwanda. This is somehow confirmed by the
percent of the respondents who agreed about the above mentioned non-relationship;
these respondents represent 15(10.8%) of the total of respondents. Those who
strongly agreed about the relationship, they represent 10(7.2%) only. From this
Table, the researcher may conclude that the majority of the respondents, representing
99(72.2%), confirmed that the independent auditors have a correlation with the
increase of the number of customers of the MFIs in Rwanda. One of the reasons
could be due to what external auditors do i.e. pointing out shortcomings which board
and management should address to improve performance of a company. Some of the
improvements include cutting expenses, increasing sales, etc. those measures
normally improve what customers get from the company i.e. lower prices and high
quality of goods.
168
Table 4.57: Frequency on independent auditing and number of loans
Frequency Percent
Valid
Percent
Cumulative
Percent
Valid Strongly agree 12 8.6 8.6 8.6
Agree 9 6.5 6.5 15.1
Neither agree
nor disagree 13 9.4 9.4 24.5
Disagree 41 29.5 29.5 54.0
Strongly
disagree 64 46.0 46.0 100.0
Total 139 100.0 100.0
Source: Primary data, September 2011
Table illustrates that respondents who strongly disagreed on that independent
auditors have no correlation with the increase of the loans issued to customers by
MFIs represent only 64(46%) while those who disagreed represent 41(29.5%). This
displays that 105(75.5%) confirmed that the relationship does exist; this shows to the
researcher that independent auditors have a correlation with the increase of the loans
issued to customers by MFIs. The percent of the respondents who neither agreed nor
disagreed about that non-relationship represented only 13(9.4%). This means that
they don’t have any knowledge about the relationship between the independent
auditors and the increase of the loans issued to customers by MFIs in Rwanda. This
is somehow confirmed by the percent of the respondents who agreed about the above
mentioned non-relationship. These respondents represented 9(6.4%) of the total of
169
respondents. Those who strongly agreed about the non-relationship, they represent
12(8.6%). From this table, the researcher may conclude that the majority of the
respondents, representing 105(75.5%), confirmed that the independent auditors have
a correlation with the increase of the loans issued to customers by MFIs in Rwanda.
One of the reasons could be due to what external auditors do i.e. pointing out
shortcomings which board and management should address to improve performance
of a company. Some of the improvements include cutting expenses, increasing sales
etc. Those measures normally improve what customers get from the company i.e.
lower prices and high quality of goods.
The research findings were supported by Kim, Nofsinger and Mohr (2010) saying
that the independent auditors are there to balance the power of the CEO and work for
the will of the board members on behalf of the shareholders.
Table 4. 58 : Frequency on independent auditing and debt recovery
Frequency Percent
Valid
Percent
Cumulative
Percent
Valid Strongly agree 8 5.8 5.8 5.8
Agree 12 8.6 8.6 14.4
Neither agree
nor disagree 13 9.4 9.4 23.7
Disagree 39 28.1 28.1 51.8
Strongly
disagree 67 48.2 48.2 100.0
Total 139 100.0 100.0
Source: Primary data, September 2011
170
Table 4.58 illustrates that respondents who strongly disagreed on that independent
auditors have no correlation with the debt recovery by the MFIs represented only
67(48.2%) while those who disagreed represent 39(28.1%). This displays that
106(76.3%) confirmed that the relationship between the independent auditors and the
debt recovery by the MFIs in Rwanda does exist. This confirms to the researcher that
independent auditors have a correlation with the debt recovery by the MFIs. The
percent of the respondents who neither agreed nor disagreed about that relationship
represent only 13(9.4%). This means that they don’t have any knowledge about the
non-relationship between the independent auditors and the debt recovery by the
MFIs in Rwanda. This relationship is somehow confirmed by the percent of the
respondents who agreed about the above mentioned non-relationship; these
respondents represent 12(8.6%) of the total of respondents. Those who strongly
agreed about the non-relationship, they represent 8(5.8%). From this Table, the
researcher may conclude that the majority of the respondents, representing
106(76.3%), confirmed that the independent auditors have a correlation with the debt
recovery by the MFIs in Rwanda. One of the reasons could be due to what external
auditors do i.e. pointing out shortcomings which board and management should
address to improve performance of a company. Some of the improvements include
cutting expenses, increasing sales, better methods of recovering debts, etc. Those
measures normally improve what a company does and how it does it.
171
Table 4.59: Frequency on independent auditing and profitability
Frequency Percent
Valid
Percent
Cumulative
Percent
Valid Strongly agree 7 5.0 5.0 5.0
Agree 14 10.1 10.1 15.1
Neither agree nor
disagree 7 5.0 5.0 20.1
Disagree 46 33.1 33.1 53.2
Strongly disagree 65 46.8 46.8 100.0
Total 139 100.0 100.0
Source: Primary data, September 2011
Table 4.59 illustrates that respondents who strongly disagreed that independent
auditors have no correlation with the profitability of the MFIs represent only
65(46.8%) while those who disagreed represented 46(33.1%). This table above
shows that 111(79.9%) confirmed that the relationship does exist. This high percent
demonstrates to the researcher that independent auditors have a correlation with the
profitability of the MFIs. The percent of the respondents who neither agreed nor
disagreed about that relationship represent only 7(5%). This means that they don’t
have any knowledge about the relationship between the independent auditors and the
profitability of the MFIs in Rwanda. This is somehow confirmed by the percent of
the respondents who agreed about the above mentioned nonrelationship; these
respondents represent 14(10.1%) of the total of respondents. Those who strongly
agreed about the nonrelationship, they represent 7(5%). From this table, the
researcher may conclude that the majority of the respondents, representing
172
111(79.9%), confirmed that the independent auditors have a correlation with the
profitability of the MFIs in Rwanda. One of the reasons could be due to what
external auditors do i.e. pointing out shortcomings which board and management
should address to improve performance of a company. Some of the improvements
include cutting expenses, increasing sales, etc. Those measures normally improve
profitability.
The research findings were supported by Kim, Nofsinger and Mohr (2010) who say
that the external audit services are demanded as monitoring devices that reduce
information asymmetries and agency costs between the company’s managers and
stakeholders by allowing a third (outside) party to verify the validity of financial
statements. More specifically, one of the purposes of the external audit function is to
assure the timeliness and accuracy of the reporting of relevant information to
shareholders this assurance is needed because users of financial statements do not
have the opportunity or time to verify whether the statements actually reflect
underlying business transactions.
In addition to that, external auditors being independent from the CEO of the firm
being audited and because their explicit job is to check for financial misstatement
and adherence to GAAP, it is they who must ensure the accuracy of the firm’s
financial information for shareholders (Kim, Nofsinger and Mohr, 2010).
4.5.2 Internal audit and performance of MFIs in Rwanda
Many firms have internal auditors as said by Kenneth (2010); their responsibilities
are to oversee the firm’s financial and operating procedures, to check the accuracy of
173
the financial record-keeping, to implement improvements with internal control, to
ensure compliance with accounting standards and regulations, and to detect fraud and
errors. According to Kenneth (2010) by accomplishing its duties, internal auditing
contributes to the performance. The biggest constraint the internal auditing faces is
that it is under the power of the CEO who may reject the recommendations made by
internal auditors.
This subsection deals with the research findings and analysis of data related to the
fourth nil hypothesis as stated in the section 4.6. Following are findings on the
correlation between the internal audit and performance of MFIs in Rwanda.
Table 4. 60 : Frequency on internal auditing and social living conditions
Frequency Percent Valid
Percent Cumulative
Percent Valid Strongly agree 5 3.6 3.6 3.6
Agree 11 7.9 7.9 11.5
Neither agree nor
disagree 24 17.3 17.3 28.8
Disagree 67 48.2 48.2 77.0
Strongly disagree 32 23.0 23.0 100.0
Total 139 100.0 100.0
Source: Primary data, September 2011
Table 4.60 illustrates that respondents who strongly disagreed on that internal
auditors have no correlation with the social living conditions of customers of the
MFIs represent only 32(23%) while those who disagreed represented 67(48.2%).
This displays that 99(71.2%) confirmed that the relationship does exist; this shows to
174
the researcher that the internal auditors have a influence on the social living
conditions of customers of the MFIs. The percent of the respondents who neither
agreed nor disagreed about that relationship represented 24(17.3%). This means that
they don’t have any knowledge about the relationship between the internal auditors
have and the social living conditions of customers of the MFIs in Rwanda. This is
somehow confirmed by the rate of the respondents who agreed about the above
mentioned non-relationship, the respondents represent 11(7.9%) of the total of the
respondents. Those who strongly agreed about the non-relationship, they represent
5(3.6%) only. From this table, the researcher may conclude that the majority of the
respondents, representing 99(71.2%), confirmed that the internal auditors have a
correlation with the social living conditions of customers of the MFIs in Rwanda.
One of the reasons could be due to what an internal audit does for a company i.e. by
helping a company to comply with internal policies, procedures, rules as well as
complying with external statutory requirements. By so doing, a company could
reduce its costs, increase its revenue and provide goods and services of high quality
to customers.
Table 4. 61 : Frequency on internal auditing and economic living conditions
Frequency Percent
Valid
Percent
Cumulative
Percent
Valid Strongly agree 3 2.2 2.2 2.2
Agree 10 7.2 7.2 9.4 Neither agree nor
disagree 28 20.1 20.1 29.5
Disagree 66 47.5 47.5 77.0 Strongly disagree 32 23.0 23.0 100.0 Total 139 100.0 100.0
Source: Primary data, September 2011
175
Table 4.61 clearly illustrates that respondents who strongly disagreed on that internal
auditors have no correlation with the economic living conditions of customers of the
MFIs represent only 32(23%) while those who disagreed represented 66(47.5%).
This shows that 98(70.5%) confirmed that the relationship does exist; this shows to
the researcher that the internal auditors have a correlation with the economic living
conditions of customers of the MFIs. The percent of the respondents who neither
agreed nor disagreed about that relationship represented 28(20.1%). This means that
they don’t have any knowledge about the relationship between the internal auditors
have and the economic living conditions of customers of the MFIs in Rwanda. This
is somehow confirmed by the rate of the respondents who agreed about the above
mentioned non-relationship, the respondents represent 10(7.2%) of the total of the
respondents. Those who strongly agreed about the non-relationship, they represent
3(2.2%) only. From this Table, the researcher may conclude that the majority of the
respondents, representing 98(70.5%), confirmed that the internal auditors have a
correlation with the economic living conditions of customers of the MFIs in Rwanda.
One of the reasons could be due to what an internal audit does for a company i.e. by
helping a company to comply with internal policies, procedures, rules as well as
complying with external statutory requirements. By so doing, a company could
reduce its costs, increase its revenue and provide goods and services of high quality
to customers.
176
Table 4. 62 : Frequency on internal auditing and number of customers
Frequency Percent Valid
Percent Cumulative
Percent Valid Strongly agree 5 3.6 3.6 3.6 Agree 9 6.5 6.5 10.1 Neither agree nor
disagree 32 23.0 23.0 33.1
Disagree 75 54.0 54.0 87.1 Strongly disagree 18 12.9 12.9 100.0 Total 139 100.0 100.0
Source: Primary data, September 2011
Table 4.62 shows that the respondents who strongly disagreed on that internal
auditors have no correlation with the increase of the number of customers of the
MFIs represent only 18(12.9%); while the respondents who disagreed represented
75(54%). This displays that 93(66.9%) confirmed that the relationship does exist.
This shows to the researcher that the internal auditors have a correlation with the
increase of the number of customers of the MFIs. The percent of the respondents
who neither agreed nor disagreed about that relationship represented 32(23%). It is
greater than those who strongly disagreed about that relationship. This means that
this percent of the respondents didn’t have any knowledge about the relationship
between the internal auditors have and the increase of the number of customers of the
MFIs in Rwanda. The existence of the relationship is somehow confirmed by the
low rate of the respondents who agreed about it, the respondents represented 9(6.5%)
of the total of the respondents. Those who strongly agreed about the relationship,
they represented 5(3.6%) only. From this table, the researcher may conclude that the
majority of the respondents, representing 93(66.9%), confirmed that the internal
auditors have a correlation with the increase of the number of customers of the MFIs
in Rwanda. One of the reasons could be due to what an internal audit does for a
177
company i.e. by helping a company to comply with internal policies, procedures,
rules as well as complying with external statutory requirements. By so doing, a
company could reduce its costs, increase its revenue and provide goods and services
of high quality to customers.
The research findings were in agreement with the conclusions of Kim, Nofsinger and
Mohr (2010) who said that one of the objectives of the internal audit is to provide
assurance that the risk management processes are functioning as intended. Through
specific recommendations and other consulting services, the internal audit function
furthermore assists the CEO and other senior management by improving risk
management and control processes. Internal auditors are very familiar with an
organization’s value creation, as they accumulate knowledge about the organization
throughout their careers. They can therefore be ideal consultants for the improvement
of an organization’s processes. The improvement of the internal audit is likely to
have a positive effect on customers or clients and suppliers. Thus, the internal audit
function can also be able to add value to external parties or stakeholders, the authors
said (2010).
Table 4. 63 : Frequency on internal auditing and number of loans
Frequency Percent Valid
Percent Cumulative
Percent Valid Strongly agree 4 2.9 2.9 2.9 Agree 12 8.6 8.6 11.5 Neither agree nor disagree 20 14.4 14.4 25.9 Disagree 77 55.4 55.4 81.3 Strongly disagree 26 18.7 18.7 100.0 Total 139 100.0 100.0
Source: Primary data, September 2011
178
Table 4.63 illustrates that respondents who strongly disagreed on that internal
auditors have no correlation with the increase of the number of loans issued by the
MFIs represent 26(18.7%) while those who disagreed represented 77(55.4%). This
displays that 103(74.1%) confirmed that the relationship does exist; this shows to the
researcher that the internal auditors have a correlation with the increase of the
number of loans issued by the MFIs. The percent of the respondents who neither
agreed nor disagreed about that relationship represented 20(14.4%). This means that
they don’t have any knowledge about the relationship between the internal auditors
have and the increase of the number of loans issued by the MFIs in Rwanda.
The respondents who confirmed the agreement about the above mentioned non-
relationship represented 12(8.6%) of the total of the respondents. Those who strongly
agreed about the non-relationship represented 4(2.9%) only. From this table, the
researcher may conclude that the majority of the respondents, representing
103(74.1%), confirmed that the internal auditors have a correlation with the increase
of the number of loans issued by the MFIs in Rwanda. One of the reasons could be
due to what an internal audit does for a company i.e. by helping a company to
comply with internal policies, procedures, rules as well as complying with external
statutory requirements. By so doing, a company could reduce its costs, increase its
revenue and provide goods and services of high quality to customers.
179
Table 4. 64 : Frequency on internal auditing and debt recovery
Frequency Percent Valid
Percent Cumulative
Percent Valid Strongly agree 2 1.4 1.4 1.4 Agree 5 3.6 3.6 5.0 Neither agree nor disagree 14 10.1 10.1 15.1 Disagree 70 50.4 50.4 65.5 Strongly disagree 48 34.5 34.5 100.0 Total 139 100.0 100.0
Source: Primary data, September 2011
Table 4.64 expresses that respondents who strongly disagreed on that internal
auditors have no correlation with the debt recovery by the MFIs represented
48(34.5%); while those who disagreed represent 70(54.4%). This shows that
118(84.9%) confirmed that the relationship does exist. This shows to the researcher
that the internal auditors have a correlation with the debt recovery by the MFIs. The
percent of the respondents who neither agreed nor disagreed about that relationship
represented 14(10.1%). This means that they don’t have any knowledge about the
relationship between the internal auditors have and the debt recovery by the MFIs in
Rwanda. This is somehow confirmed by the rate of the respondents who agreed
about the above mentioned non-relationship, the respondents represented only
5(3.6%) of the total of the respondents.
Those who strongly agreed about the non-relationship, they represented 2(1.4%)
only. From this table, the researcher may conclude that the majority of the
respondents, representing 118(88.9%), confirmed that the internal auditors have a
correlation with the debt recovery by the MFIs in Rwanda. One of the reasons could
180
be due to what an internal audit does for a company i.e. by helping a company to
comply with internal policies, procedures, rules as well as complying with external
statutory requirements. By so doing, a company could reduce its costs, increase its
revenue, improve debt collection and provide goods and services of high quality to
customers.
Table 4. 65 : Frequency on internal auditing and profitability
Frequency Percent Valid
Percent Cumulative
Percent Valid Strongly agree 3 2.2 2.2 2.2
Agree 8 5.8 5.8 7.9
Neither agree
nor disagree 6 4.3 4.3 12.2
Disagree 72 51.8 51.8 64.0
Strongly
disagree 50 36.0 36.0 100.0
Total 139 100.0 100.0
Source: Primary data, September 2011
Table 4.65 shows that respondents who strongly disagreed on that internal auditors
have no correlation with the profitability of the MFIs represent only 50(36%) while
those who disagreed represented 72(51.8%). This displays that 122(87.8%)
confirmed that the relationship does exist; this shows to the researcher that the
internal auditors have a correlation with the profitability of the MFIs. The percent of
the respondents who neither agreed nor disagreed about that relationship represented
only 6(4.3%). This means that they don’t have any knowledge about the relationship
181
between the internal auditors have and the profitability of the MFIs in Rwanda. The
relationship is somehow confirmed by the low rate of the respondents who agreed
about the above mentioned non-relationship, the respondents represented 8(5.8%) of
the total respondents. Those who strongly agreed about the non-relationship, they
represented 3(2.2%) only. From this table, the researcher may conclude that the
majority of the respondents, representing 122(87.8%), confirmed that the internal
auditors have a correlation with the profitability of the MFIs in Rwanda.
4.6.3 Testing the hypothesis number four
This section aims at testing the hypothesis number four using crosstabilation after
grouping the frequencies of the five Likert Scale into two groups of those who
agreed and those who disagreed. As the crosstabulation method was to get opinions
from respondents on the non correlation between the size of the supervision, as one
of the variables of corporate governance, and the ones of performance of MFIs in
Rwanda; the researcher crosstabulated those various variables to find out their
opinions.
182
Table 4. 66 : Supervision and social living conditions Cross tabulation
No correlation between internal
auditors and social living conditions Total
Agree Disagree No correlation between independent auditors and social living conditions
Agree Count
15 15 30
% within independent auditors and social living conditions
50.0% 50.0% 100.0%
% within internal auditors and social living conditions
37.5% 15.2% 21.6%
% of Total 10.8% 10.8% 21.6% Disagree Count 25 84 109 % within independent
auditors and social living conditions
22.9% 77.1% 100.0%
% within internal auditors and social living conditions
62.5% 84.8% 78.4%
% of Total 18.0% 60.4% 78.4% Total Count 40 99 139 % within independent
auditors and social living conditions
28.8% 71.2% 100.0%
% within internal auditors and social living conditions
100.0% 100.0% 100.0%
% of Total 28.8% 71.2% 100.0%
Source: Primary data, September 2011
Table 4.66 shows that the respondents who agreed on the statement of no correlation
between independent auditors and the social living conditions of MFIs’ customers in
Rwanda were 15 (50%) out of 30 (100%); and those who agreed on the the statement
of no correlation between internal auditors and the social living conditions of MFIs’
customers in Rwanda were 15(37.5%) out 40(100%).
183
The respondents who disagreed on the statement of no correlation between
independent auditors and the social living conditions of MFIs’ customers were 84
(77.1%) out 109 (100%); and those who disagreed on the statement of no correlation
between internal auditors and the social living conditions of MFIs’ customers in
Rwanda were 84 (84.8%) out 99(100%).
The table 4.66 shows that only 15(10.8%) out of 139 (100%) respondents agreed on
the statement of no correlation between the supervision and the impact of MFIs on
the customers’ social living conditions, while a total of 84(60.4%) out of 139(100%)
disagreed on that statement. The remaining were the respondents who did neither
agreed or disagreed to the afore mentioned statement.
From these opinions, one may say that respondents think that supervision correlates
with the impact of MFIs’ customers as far as the social living conditions of their
customers in Rwanda are concerned.
Table 4. 67: Chi-Square Tests of the correlation between the supervision and
the social living conditions
Value df Asymp. Sig.
(2-sided) Exact Sig. (2-sided)
Exact Sig. (1-sided)
Pearson Chi-Square 8.407(b) 1 .004 Continuity Correction(a) 7.139 1 .008
Likelihood Ratio 7.858 1 .005 Fisher's Exact Test .006 .005 Linear-by-Linear Association 8.347 1 .004
N of Valid Cases 139 a Computed only for a 2x2 table
Source: Primary data, September, 2011
184
Table 4. 68: Supervision and economic living conditions Crosstabulation
No correlation between internal
auditors and economic living
conditions Total
Agree Disagree No correlation between independent auditors and economic living conditions
Agree Count
9 20 29
% within independent auditors and economic living conditions
31.0% 69.0% 100.0%
% within internal auditors and economic living conditions
22.0% 20.4% 20.9%
% of Total 6.5% 14.4% 20.9% Disagree Count 32 78 110 % within
independent auditors and economic living conditions
29.1% 70.9% 100.0%
% within internal auditors and economic living conditions
78.0% 79.6% 79.1%
% of Total 23.0% 56.1% 79.1% Total Count 41 98 139 % within
independent auditors and economic living conditions
29.5% 70.5% 100.0%
% within internal auditors and economic living conditions
100.0% 100.0% 100.0%
% of Total 29.5% 70.5% 100.0% Source: Primary data, September 2011
185
Table 4.67 shows the calculated Chi-Square value which is 8.407 while the critical
value is 3.841 at a degree of precision of 95%. Since the calculated value is greater
than the critical value, the null hypothesis was rejected. Therefore, this test shows
that there is a correlation between the supervision and the social living conditions of
MFIs’ customers. This test is statistically significant.
Table 4.68 shows that the respondents who agreed on the statement of no correlation
between independent auditors and the economic living conditions of MFIs’
customers in Rwanda were 9 (31%) out of 29 (100%); and those who agreed on the
statement of no correlation between internal auditors and the economic living
conditions of MFIs’ customers in Rwanda were 9(22%) out 41(100%).
The respondents who disagreed on the statement of no correlation between
independent auditors and the economic living conditions of MFIs’ customers were78
(70.9%) out 110 (100%); and those who disagreed on the statement of no correlation
between internal auditors and the economic living conditions of MFIs’customers in
Rwanda were78 (79.6%) out 98(100%).
Table 4.68 shows that only 9(6.5%) out of 139 (100%) respondents agreed on the
statement of no correlation between the supervision and the impact of MFIs on the
customers’ economic living conditions, while a total of 78(56.1%) out of 139(100%)
disagreed on that statement. The remaining were the respondents who did neither
agreed or disagreed on the above mentioned statement.
186
From these opinions, one may say that respondents think that supervision correlates
with the impact of MFIs’ customers as far as the economic living conditions of their
customers in Rwanda are concerned.
Table 4. 69 : Chi-Square Tests of the correlation between the supervision and
the economic living conditions
Value Df
Asymp. Sig.
(2-sided)
Exact Sig.
(2-sided)
Exact Sig.
(1-sided)
Pearson Chi-Square .042(b) 1 .838
Continuity
Correction(a) .000 1 1.000
Likelihood Ratio .041 1 .839
Fisher's Exact Test .823 .502
Linear-by-Linear
Association .041 1 .839
N of Valid Cases 139
a Computed only for a 2x2 table
Source: Primary data, September 2011
Table 4.69 discloses the calculated Chi-Square value which is .042 while the critical
value is 3.841 at a degree of precision of 95%. Since the calculated value is less than
the critical value, the null hypothesis was accepted. Therefore, this test shows that
there is no correlation between the supervision and the social living conditions of
MFIs’ customers in Rwanda. The test is not statistically significant.
187
Table 4. 70 : Supervision and number of customers Crosstabulation
No correlation between internal
auditors and number of customers Total
Agree Disagree No correlation between independent auditors and number of customers
Agree
Count 20 20 40
% within independent auditors and number of customers
50.0% 50.0% 100.0%
% within internal auditors and number of customers
43.5% 21.5% 28.8%
% of Total 14.4% 14.4% 28.8% Disagree Count 26 73 99 % within independent
auditors and number of customers
26.3% 73.7% 100.0%
% within internal auditors and number of customers
56.5% 78.5% 71.2%
% of Total 18.7% 52.5% 71.2% Total Count 46 93 139 % within independent
auditors and number of customers
33.1% 66.9% 100.0%
% within internal auditors and number of customers
100.0% 100.0% 100.0%
% of Total 33.1% 66.9% 100.0%
Source: Primary data, September 2011
Table 4.70 shows that the respondents who agreed on the statement of no correlation
between independent auditors and the increase of the number of MFIs’ customers in
Rwanda were 20 (50%) out of 40 (100%); and those who agreed on the statement of
188
no correlation between internal auditors and the increase of the number of MFIs’
customers in Rwanda were 20(43.5%) out 46(100%). The respondents who disagreed
on the statement of no correlation between independent auditors and the increase of
the number of MFIs’ customers are 73 (73.7%) out 99 (100%); and those who
disagreed on the statement of no correlation between internal auditors and the
increase of the number of MFIs’ customers in Rwanda are 73 (84.8%) out 93(100%).
Table 4.70 shows that only 20(14.4%) out of 139 (100%) respondents agreed on the
statement of no correlation between the supervision and the outreach of MFIs as far
as the increase of the number of customers is concerned, while a total of 73(52.5%)
out of 139(100%) disagreed on that statement. The remaining were the respondents
who did neither agreed or disagreed on the above mentioned statement. From these
respondents’ opinions, one may think that respondents think that supervision
correlates with the outreach of MFIs as far as the increase of the number of their
customers in Rwanda is concerned.
Table 4. 71: Chi-Square Tests of correlation between the supervision and the
number of customers
Value df Asymp. Sig.
(2-sided) Exact Sig. (2-sided)
Exact Sig. (1-sided)
Pearson Chi-Square 7.250(b) 1 .007 Continuity Correction(a) 6.218 1 .013
Likelihood Ratio 7.028 1 .008 Fisher's Exact Test .010 .007 Linear-by-Linear Association 7.198 1 .007
N of Valid Cases 139
a Computed only for a 2x2 table
Source: Primary data, September 2011
189
The Table 4.71 shows the calculated Chi-Square value which is 6.250 while the
critical value is 3.841 at a degree of precision of 95%. Since the calculated value is
greater than the critical value, the null hypothesis was rejected. Therefore, this test
shows that there is a correlation between the supervision and the increase of MFIs’
customers in Rwanda. This test is statistically significant.
Table 4. 72: Supervision and number of loans Crosstabulation
No correlation between internal
auditors and number of loans Total
Agree Disagree No correlation between independent auditors and number of loans
Agree Count
12 22 34
% within independent auditors and number of loans
35.3% 64.7% 100.0%
% within internal auditors and number of loans
33.3% 21.4% 24.5%
% of Total 8.6% 15.8% 24.5% Disagree Count 24 81 105 % within independent
auditors and number of loans
22.9% 77.1% 100.0%
% within internal auditors and number of loans
66.7% 78.6% 75.5%
% of Total 17.3% 58.3% 75.5% Total Count 36 103 139 % within independent
auditors and number of loans
25.9% 74.1% 100.0%
% within internal auditors and number of loans
100.0% 100.0% 100.0%
% of Total 25.9% 74.1% 100.0%
Source: Primary data, September 2011
190
Table 4.72 shows that the respondents who agreed on the statement of no correlation
between independent auditors and the number of loans issued to MFIs’ customers in
Rwanda are 12 (35.3%) out of 34 (100%); and those who agreed on the the statement
of no correlation between internal auditors and the number of loans issued to MFIs’
customers in Rwanda were 12(33.3%) out 36(100%).
The respondents who disagreed on the statement of no correlation between
independent auditors and the number of loans issued to MFIs’ customers are 81
(77.1%) out 105 (100%); and those who disagreed on the statement of no correlation
between internal auditors and the number of loans issued to MFIs’customers in
Rwanda were 81(78.6%) out 103(100%).
The table 4.72 shows that only 12(8.6%) out of 139 (100%) respondents agreed on
the statement of no correlation between the supervision and the outreach of MFIs as
far as the increase of the increase of loans is concerned, while a total of 81(58.3%)
out of 139(100%) disagreed on that statement. The remaining were the respondents
who did neither agreed or disagreed on the above mentioned statement.
From these views, one may say that respondents think that supervision correlates
with the outreach of MFIs as far as the increase of loans issued to their customers is
concerned in Rwanda.
191
Table 4. 73: Tests of correlation between the supervision and the number of
loans
Value df
Asymp. Sig.
(2-sided)
Exact Sig.
(2-sided)
Exact Sig. (1-
sided)
Pearson Chi-
Square 2.070(b) 1 .150
Continuity
Correction(a) 1.473 1 .225
Likelihood Ratio 1.983 1 .159
Fisher's Exact
Test .178 .114
Linear-by-Linear
Association 2.055 1 .152
N of Valid Cases 139
a Computed only for a 2x2 table
Source: Primary data, September 2011
Table 4.73 shows the calculated Chi-Square value which is 2.070 while the critical
value is 3.841 at a degree of precision of 95%. Since the calculated value is less than
the critical value, the null hypothesis was accepted. Therefore, this test shows that
there is no correlation between the supervision and the increase of number of loans to
MFIs’ customers in Rwanda. The test is not statistically significant.
192
Table 4.74: Supervision and debt recovery Crosstabulation
No correlation
between internal
auditors and debt
recovery Total
Agree Disagree
No correlation
between
independent
auditors and
debt recovery
Agree Count
10 23 33
% within independent
auditors and debt recovery 30.3% 69.7% 100.0%
% within internal auditors
and debt recovery 47.6% 19.5% 23.7%
% of Total 7.2% 16.5% 23.7%
Disagree Count 11 95 106
% within independent
auditors and debt recovery 10.4% 89.6% 100.0%
% within internal auditors
and debt recovery 52.4% 80.5% 76.3%
% of Total 7.9% 68.3% 76.3%
Total Count 21 118 139
% within independent
auditors and debt recovery 15.1% 84.9% 100.0%
% within internal auditors
and debt recovery 100.0% 100.0% 100.0%
% of Total 15.1% 84.9% 100.0%
Source: Primary data, September 2011
Table 4.74 shows that the respondents who agreed on the statement of no correlation
between independent auditors and the debt recovery by MFIs in Rwanda are 10
(30.3%) out of 33 (100%); and those who agreed on the statement of no correlation
193
between internal auditors and the recovery by MFIs in Rwanda are 10(47.6%) out
21(100%).
The respondents who disagreed on the statement of no correlation between
independent auditors and the recovery by MFIs in Rwanda were 95 (89.6%) out
106(100%); and those who disagreed on the statement of no correlation between
internal auditors and the recovery by MFIs in Rwanda were 95 (68.3%) out
118(100%).
The table 4.74 shows that only 10(7.2%) out of 139 (100%) respondents agreed on
the statement of no correlation between the supervision and the sustainability of
MFIs as far as the debt recovery is concerned, while a total of 95(68.3%) out of
139(100%) disagreed on that statement. The remaining were the respondents who did
neither agreed nor disagreed on the above mentioned statement. From these views,
one may say that respondents think that supervision correlates with the sustainability
of MFIs as far as the debt recovery is concerned in Rwanda.
Table 4.75: Chi-Square Tests of correlation between the supervision and the
debt recovery
Value df Asymp. Sig.
(2-sided) Exact Sig. (2-sided)
Exact Sig. (1-sided)
Pearson Chi-Square 7.790(b) 1 .005 Continuity Correction(a) 6.314 1 .012
Likelihood Ratio 6.888 1 .009 Fisher's Exact Test .010 .008 Linear-by-Linear Association 7.734 1 .005
N of Valid Cases 139 a Computed only for a 2x2 table
Source: Primary data, September 2011
194
The Table 4.75 shows the calculated Chi-Square value which is 7.790 while the
critical value is 3.841 at a degree of precision of 95%. Since the calculated value is
greater than the critical value, the null hypothesis was rejected. Therefore, this test
shows that there is a correlation between the supervision and the debt recovery of
MFIs in Rwanda. The test is statistically significant.
Table 4. 76 : Supervision and profitability Crosstabulation
No correlation between internal
auditors and profitability Total
Agree Disagree No correlation between independent auditors and profitability
Agree Count
12 16 28
% within independent auditors and profitability 42.9% 57.1% 100.0%
% within internal auditors and profitability 70.6% 13.1% 20.1%
% of Total 8.6% 11.5% 20.1% Disagree Count 5 106 111 % within independent
auditors and profitability 4.5% 95.5% 100.0%
% within internal auditors and profitability 29.4% 86.9% 79.9%
% of Total 3.6% 76.3% 79.9% Total Count 17 122 139 % within independent
auditors and profitability 12.2% 87.8% 100.0%
% within internal auditors and profitability 100.0% 100.0% 100.0%
% of Total 12.2% 87.8% 100.0% Source: Primary data, September 2011
Table 4.76 shows that the respondents who agreed on the statement of no correlation
between independent auditors and the profitability of MFIs in Rwanda are 12(42.9%)
195
out of 28(100%); and those who agreed on the statement of no correlation between
internal auditors and the profitability of MFIs in Rwanda are 12(70.6%) out
17(100%). The respondents who disagreed on the statement of no correlation
between independent auditors and the profitability of MFIs in Rwanda were 106
(86.9%) out 111 (100%); and those who disagreed on the statement of no correlation
between internal auditors and the profitability of MFIs in Rwanda were 106 (84.8%)
out 122(100%).
Table 4.76 shows that only 12(8.6%) out of 139 (100%) respondents agreed on the
statement of no correlation between the supervision and the sustainability of MFIs as
far as the profitability is concerned, while a total of 106(76.3%) out of 139(100%)
disagreed on that statement. The remaining were the respondents who did neither
agreed or disagreed on the above mentioned statement. From these views, one may
say that respondents think that supervision correlates with the sustainability of MFIs
as far as the profitability is concerned in Rwanda.
Table 4.77: Chi-Square Tests of correlation between the supervision and the
profitability
Value Df
Asymp. Sig. (2-sided)
Exact Sig. (2-sided)
Exact Sig. (1-sided)
Pearson Chi-Square 30.639(b) 1 .000
Continuity Correction(a) 27.171 1 .000
Likelihood Ratio 24.258 1 .000 Fisher's Exact Test .000 .000
Linear-by-Linear Association 30.419 1 .000
N of Valid Cases 139 a Computed only for a 2x2 table Source: Primary data, September 2011
196
Table 4.77 shows the calculated Chi-Square value which is 30.639 while the critical
value is 3.841 at a degree of precision of 95%. Since the calculated value is greater
than the critical value, the null hypothesis was rejected. Therefore, this test shows
that there is a correlation between the supervision and the profitability of MFIs’
customers in Rwanda. This test is statistically significant.
4.7 Discussion of Findings
In discussing the findings, the researcher wanted to accept or to reject the null
hypotheses of the study. According to William (2007), the null hypothesis is rejected
when the calculated values are greater than the critical values or when the Pvalues
are less than the level of significance. In the study, the author used the critical value
and the calculated values to give his position as far as the test to be or statistically
significant.
4.7.1 Size of board of directors and performance of MFIs in Rwanda
Ho (1): There is no correlation between the size of the board of directors and the
performance of microfinance institutions in Rwanda. This nul hypothesis can be split
into six nul hypotheses as follows:
(i) There is no correlation between the size of the board of directors and the
social living conditions of MFIs customers
The Table 4.18 shows that only 12(8.6%) out of 139 (100%) respondents agreed on
the statement of no correlation between the board size and the impact of MFIs on the
customers social living conditions, while a total of 76(54.7%) out of 139(100%)
disagreed on that statement. From these opinions, one may confirm that respondents
197
think that board size correlates with social living conditions of MFIs’ customers in
Rwanda. From the Chi Square test, the researcher found that the test was statistically
significant and led to reject this sub null hypothesis.
(ii) There is no correlation between the size of the board of directors and the
economic living conditions of MFIs customers
The Table 4.20 shows that only 12(8.6%) out of 139 (100%) respondents agreed with
the statement of no correlation between the board size and the impact of MFIs on the
customers economic living conditions, while a total of 71(51.1%) out of 139(100%)
disagreed on that statement. From these opinions, one may confirm that respondents
think that board size correlates with economic living conditions of MFIs’ customers
in Rwanda. From the Chi Square test, the researcher found that the test was not
statistically significant and led to accept this sub null hypothesis.
(iii) There is no correlation between the size of the board of directors and the
increase of the number of MFIs’ customers
The Table 4.22 shows that only 17(8.6%) out of 139(100%) respondents agreed on
the statement of no correlation between the board size and the outreach of MFIs as
far the increase of the number of customers is concerned, while a total of 68(48.9%)
out of 139(100%) disagreed on that statement. From these opinions, one may
confirm that respondents think that board size does not correlate with outreach as far
as the increase of MFIs’ customers is concerned in Rwanda. From the Chi Square
test, the researcher found that the test was statistically significant and led to reject
this sub null hypothesis.
198
(iv) There is no correlation between the size of the board of directors and the
number of loans issued by MFIs to customers
The Table 4.24 shows that only 13(9.4%) out of 139 (100%) respondents agreed on
the statement of no correlation between the board size and the outreach of MFIs as
far as the increase of the number of loans is concerned, while a total of 73(52.5%)
out of 139(100%) disagreed on that statement. From these opinions, one may
confirm that respondents think that board size correlates with the outreach of MFIs
as far as the increase of number of loans is concerned in Rwanda. From the Chi
Square test, the researcher found that the test was not statistically significant and led
to accept this sub null hypothesis.
(v) There is no correlation between the size of the board of directors and the debt
recovery by MFIs
The Table 4.26 shows that only 17(12.2%) out of 139 (100%) respondents agreed
with the statement of no correlation between the board size and the sustainability of
MFIs as far as the debt recovery is concerned in Rwanda, while a total of 68(49.8%)
out of 139(100%) disagreed on that statement. From these opinions of respondents,
one may confirm that respondents think that board size does not correlate with
sustainability of MFIs as far as the debt recovery is concerned in Rwanda. From the
Chi Square test, the researcher found that the test was not statistically significant and
led to accept this sub null hypothesis. (vi) There is no correlation between the size of the board of directors and the
profitability of MFIs
199
The Table 4.28 shows that only 20(14.4%) out of 139 (100%) respondents agreed on
the statement of no correlation between the board size and the impact of MFIs on the
customers living conditions, while a total of 38(27.3%) out of 139(100%) disagreed
on that statement. From the respondents’ opinions, one may confirm that the board
size does not correlate with sustainability as far as profitability of MFIs is concerned
in Rwanda. From the Chi Square test, the researcher found that the test was not
statistically significant and led to accept this sub null hypothesis.
Thought out the findings on the first hypothesis, the researcher found that the
findings are mixed to the extent that for some subnull hypotheses of the tests were
not statistically significant and whilst other tests were statistically significant. Thes
findings support various empirical studies in terms of mixture as far as the link
between the board size and the performance is concerned. Authors like Vafeas
(2000) and Roselina (2007) reported that firms with smallest boards are better
informed about the earnings of the firm and thus can be regarded as having better
monitoring abilities. To them there is a link between the board size and the corporate
performance. Similar findings were reported by Dalton and Dalton (2005) saying that
larger board size is likely to be associated with an increase in board diversity in
terms of experience, skills, gender and nationality; thus increasing the performance
of companies. These findings on board size support the empirical research of Morten
et al., (2006) which has established a negative relationship between board size and
firm performance. Other authors Hermalin and Weisbach (2003) conclude that
finding out the link on board size and corporate performance is an important topic for
future research. This conclusion was due to the fact that the results for most of
200
empirical studies were mixed as far as the link between the board size and the
performance of MFIs.
4.7.2 Board composition and performance of MFIs in Rwanda
Ho (2): There is no correlation between the board composition and the performance of
microfinance institutions in Rwanda. This second nul hypothesis can also be split
into six other nul hypotheses as follows:
(i) There is no correlation between board composition and the social living
conditions of MFs customers.
Table 4.42 shows that only 20(14.4%) out of 139 (100%) respondents agreed with
the statement of no correlation between the board composition and the impact of
MFIs on the customers social living conditions, while a total of 70(50.4%) out of
139(100%) disagreed on that statement. These respondents’ opinions show that there
might be a correlation between the board composition and the impact of MFIs as far
as the social living conditions of MFIs’ customers are concerned in Rwanda. The Chi
Square crosstabulation, the researcher found that the test was statistically significant
and led to reject the above sub null hypothesis.
(ii) There is no correlation between board composition and the economic living
conditions of MFs customers.
Table 4.44 shows that only 15(10.8%) out of 139 (100%) respondents were in
agreement with the statement that there was no correlation between the board
composition and the impact of MFIs on the customers social living conditions, while
a total of 67(48.2%) out of 139(100%) disagreed on that statement. These
201
respondents’ views show that there might not be any correlation between the board
composition and the impact of MFIs as far as the social living conditions of MFIs’
customers are concerned in Rwanda. The Chi Square crosstabulation, the researcher
found that the test was not statistically significant and led to accept the above sub
null hypothesis.
(iii) There is no correlation between board composition and the increase of the
number of MFs customers.
Table 4.46 shows that only 16(11.5%) out of 139 (100%) respondents agreed on the
statement of no correlation between the board composition and the outreach of MFIs
as far the increase of the number of customers is concerned, while a total of
70(50.4%) out of 139(100%) disagreed on that statement. From these opinions, one
may think that there might not be a correlation between the board composition and
the outreach of MFIs as far as the the increase of MFIs’ customers is concerned in
Rwanda. The Chi Square crosstabulation, the researcher found that the test was not
statistically significant and led to accept the above sub null hypothesis.
(iv) There is no correlation between board composition and the increase the loans
issued by MFs to customers.
The Table 4.48 shows that only 17(12.2%) out of 139 (100%) respondents agreed on
the statement of no correlation between the board composition and the outreach of
MFIs as far the increase of the number of loans issued to customers is concerned,
while a total of 82(59%) out of 139(100%) disagreed on that statement. From these
opinions, one may think that there might be a correlation between the board
202
composition and the outreach of MFIs as far as the increase of the number of loans
issued to customers is concerned in Rwanda. The Chi Square crosstabulation, the
researcher found that the test was statistically significant and led to reject the above
sub null hypothesis.
(v) There is no correlation between board composition and the debt recovery by
MFs.
Table 4.50 shows that 32(23%) out of 139 (100%) respondents agreed on the
statement of no correlation between the board composition and the sustainability of
MFIs as far as the debt recovery of MFIs is concerned, while a total of 107(77%) out
of 139(100%) disagreed on that statement. From these opinions, one may think that
there might be a correlation between the board composition and the sustainability of
MFIs as far as the debt recovery is concerned in Rwanda. The Chi Square
crosstabulation, the researcher found that the test was statistically significant and led
to reject the above sub null hypothesis.
(vi) There is no correlation between board composition and the profitability of
MFs.
Table 4.52 shows that only 20(14.4%) out of 139 (100%) respondents agreed on the
statement of no correlation between the board size and the impact of MFIs on the
customers living conditions, while a total of 38(27.3%) out of 139(100%) disagreed
on that statement. From the respondents’ opinions, one may confirm that the board
size does not correlate with sustainability as far as profitability of MFIs is concerned
203
in Rwanda. The Chi Square crosstabulation, the researcher found that the test was
statistically significant and led to reject the above sub null hypothesis.
The findings on the second hypothesis were also mixed as far as the link between the
board composition and the performance of MFIs in Rwanda. The results showed the
tests which were statistically significant for some sub null hypotheses and for others
the tests were not statistically significant. For instance, the test on the link between
the board composition and the sustainability was statistically significant and for the
other measures of performance, the tests were mixed. The findings support the
findings of Roselina (2007) who said that in actual corporate scene outside directors
are not aligned with the CEO; the CEO who is the highest ranking executive has no
power on outside directors, since the CEO has no any influence on appointing these
outside directors on board. This helps the outside board members to contribute
towards effective monitoring of the CEO. Therefore boards with more outside
members lead to enhancing firms’ performance since the agency problem decreases.
The findings of Dalton, et al. (1998) showed that board composition had no effect on
firm performance and contradicted the work of Roselina. However, the report of
Adrian Cadbury (1992) emphasized the contribution that independent non executive
board members could make; boards should consider assigning a sufficient number of
non executive board members capable of exercising independent judgement to tasks
where there is a potential for conflict interest. The Cadbury code of best practice
(1992) shows also the role of non-executive directors to bear on issues like strategy,
performance and resources. In their findings, Kim et al. (2010) say that inside
204
directors can add value because they are well informed about the company, whereas
outside directors will act more quickly than inside directors if something goes wrong;
but they may do wrong thing if their deliberations are not based on the information
availed by inside directors. Thus the mixture will improve the performance.
4.7.3 Supervision and performance of MFIs in Rwanda
The crosstabulation tables showed the frequency on the respondents’ opinions about
the whether or not there is a correlation between the supervision and the various
variables of the performance of MFIs in Rwanda. These were the opinions of
respondents on the fourth hypothesis of the study.
Ho (3): There is no correlation between the supervision and the performance of
microfinance institutions in Rwanda.
This hypothesis is split into six other nil hypotheses as follows:
(i) There is no correlation between the supervision and the social living
conditions of MFIs customers.
Table 4.67 shows that only 15(10.8%) out of 139 (100%) respondents agreed with
the statement of no correlation between the supervision and the impact of MFIs on
the customers’ social living conditions, while a total of 84(60.4%) out of 139(100%)
disagreed on that statement. From these opinions, one may say that respondents think
that supervision correlates with the impact of MFIs’ customers as far as the social
living conditions of their customers in Rwanda are concerned.
Another group discussion met in the Kigali city revealed that “MFIs have helped us
to pay some school material of our children and the health insurance at the cell
205
level. Some of us have built their own houses or refurbish them thanks to the MFIs.
Indeed MFIs have been of great help to us, but the trust has not yet increased since
the failure of some of them in 2006”.
The Chi Square crosstabulation allows the researcher found that the test was
statistically significant and led to reject the above sub null hypothesis.
(ii) There is no correlation between the supervision and the economic living
conditions of MFIs customers.
Table 4.69 shows that only 20(14.4%) out of 139 (100%) respondents agreed on the
statement of no correlation between the supervision and the outreach of MFIs as far
as the increase of the number of customers is concerned, while a total of 73(52.5%)
out of 139(100%) disagreed on that statement. From these respondents’ opinions,
one may think that respondents think that supervision correlates with the outreach of
MFIs as far as the increase of the number of their customers in Rwanda is concerned.
The Chi Square crosstabulation allows the researcher found that the test was not
statistically significant and led to accept the above sub null hypothesis.
One of the groups of clients I met in the Eastern province of Rwanda; after a long
discussion on the improvement of their economic living conditions, they said:
“Since being clients of MFIs, some of us were shocked by the failure of MFIs in
2006 and did not trust at all the sector of Microfinance. We thought that people
investing in MFI sector were coming to take our money and then after we
struggle with the government of Rwanda to get reimbursed. After a while, we
206
realised that the MFIs which are in our area were trustworthy, and then we
joined them. Since and then, our lives have changed, these MFIs have given us
short term loans for farming or setting small businesses and today we are very
grateful to them”.
(iii) There is no correlation between the supervision and the increase of the
number of MFIs customers.
Table 4.71 shows that only 20(14.4%) out of 139 (100%) respondents agreed on the
statement of no correlation between the supervision and the outreach of MFIs as far
as the increase of the number of customers is concerned, while a total of 73(52.5%)
out of 139(100%) disagreed on that statement. From these respondents’ opinions,
one may think that respondents think that supervision correlates with the outreach of
MFIs as far as the increase of the number of their customers in Rwanda is concerned.
The Chi Square crosstabulation allows the researcher found that the test was
statistically significant and led to reject the sub null hypothesis.
(iv) There is no correlation between the supervision and the increase of the
number of loans issued by MFIs to customers.
The Table 4.73 shows that only 12(8.6%) out of 139 (100%) respondents agreed on
the statement of no correlation between the supervision and the outreach of MFIs as
far as the increase of the increase of loans is concerned, while a total of 81(58.3%)
out of 139(100%) disagreed on that statement. From these views, one may say that
respondents think that supervision correlates with the outreach of MFIs as far as the
increase of loans issued to their customers is concerned in Rwanda. The Chi Square
207
crosstabulation allows the researcher found that the test was not statistically
significant and led to accept the above sub null hypothesis.
(v) There is no correlation between the supervision and the debt recovery by
MFIs.
The Table 4.75 shows that only 12(8.6%) out of 139 (100%) respondents agreed on
the statement of no correlation between the supervision and the sustainability of
MFIs as far as the profitability is concerned, while a total of 106(76.3%) out of
139(100%) disagreed on that statement. From these views, one may say that
respondents think that supervision correlates with the sustainability of MFIs as far as
the profitability is concerned in Rwanda.
The Chi Square crosstabulation allows the researcher found that the test was
statistically significant and led to reject the sub null hypothesis.
(vi) There is no correlation between the supervision and the profitability of MFIs.
The Table 4.77 shows that only 12(8.6%) out of 139 (100%) respondents agreed on
the statement of no correlation between the supervision and the sustainability of
MFIs as far as the profitability is concerned, while a total of 106(76.3%) out of
139(100%) disagreed on that statement. From these views, one may say that
respondents think that supervision correlates with the sustainability of MFIs as far as
the profitability is concerned in Rwanda. The Chi Square from the crosstabulation
allows the researcher to conclude that the test was statistically significant and led to
reject this sub-null hypothesis.
208
The findings on the third hypothesis were mixed as far as the link between the
supervision and the performance of MFIs in Rwanda. The results showed the tests
which were statistically significant for some sub null hypotheses and for others the
tests were not statistically significant. For instance, the test on the link between the
supervision and the sustainability of MFIs in Rwanda was statistically significant and
for the other measures of performance, the tests were mixed.
The findings on this correlation support the work of Mallin (2010) who said that
companies with internal audit function with strong reporting system may improve the
performance of corporation as it is an eye for the CEO on how performing he is
before any third person comes in. This is true when the CEO is willing to perform,
because internal audit is under the supervision of the management.
The research findings support also the findings of Kim et al. (2010) who say that the
external audit services are demanded as monitoring devices that reduce information
asymmetries and agency costs between the company’s managers and stakeholders by
allowing a third (outside) party to verify the validity of financial statements.
In terms of what they think should be improved in the service rendered by MFIs in
Rwanda; most of the focus groups met were aware of the role of the supervision of
MFIs because they pointed out “the strengthening of the supervision of MFI sector
to avoid any loss from the customers, the investors, the suppliers and the
government. They mentioned that the board should be of skilled people, the external
auditors should be capable to alert the public about what is going wrong within the
209
MFI sector. They added that the National Bank of Rwanda should play in an
appropriate way its role of supervising the financial sector to restore the confidence
of stakeholders in the sector”.
210
CHAPTER FIVE
5.0 SUMMARY OF FINDINGS, CONCLUSIONS AND
RECOMMENDATIONS
5.1 Introduction
This chapter presents what were the key findings, the conclusions, and the
recommendations to all stakeholders in the MFIs industry in Rwanda.
5.2 Summary of findings
Thought out the findings on the first hypothesis and the first objective, the researcher
found that the findings were mixed to the extent that for some sub null hypotheses of
the tests were not statistically significant and whilst other tests were statistically
significant. From this perspective, the objective number on was achieved as the study
shown whether or not there is a correlation between the board size and the
performance of MFIs in Rwanda.
The findings related to the second objective and the second hypothesis revealed that
for some of the measured, there is a correlation and for others there is not, therefore
the results on the hypothesis number two were also mixed as far as the link between
the board composition and the performance of MFIs in Rwanda. The results showed
the tests which were statistically significant for some sub null hypotheses and for
others the tests were not statistically significant. For instance, the test on the link
between the board composition and the sustainability was statistically significant and
for the other measures of performance, the tests were mixed. As the objective
211
number two was to determine whether or not there is a correlation between board
composition and performance of MFIs was also achieved.
The findings related to the third objective and the third hypothesis revealed that for
some of the measured, there is a correlation and for others there is not, therefore the
results on the hypothesis number three were mixed as far as the link between the
supervision and the performance of MFIs in Rwanda. The results showed the tests
which were statistically significant for some subnull hypotheses and for others the
tests were not statistically significant. For instance, the test on the link between the
supervision and the sustainability of MFIs in Rwanda was statistically significant and
for the other measures of performance, the tests were mixed. The results have shown
for which measures there is a correlation and for which there is no correlation; from
that the objective number three was achieved.
5.3 Implications of the results
1. For Policy makers
The results will help policy makers from Rwanda to design a policy on MFIs which
is in line of strengthening the industry. In addition to that, the study will help policy
makers to monitor properly the activities of MFIs in Rwanda in order to avoid any
other failure which may cause trouble to stakeholders in the Micro finance industry.
2. For the Microfinance industry
The study has awaked their attention as far as the performance is concerned; the
study will help the microfinance industry to set a proportion of board members
212
outsiders in order to balance the insiders as far as the performance is concerned. In
addition, shareholders will make sure the supervision is done rigorously so that the
performance of MFIs may be achieved.
3. For academics
Academics may gain from these results in theory development in furthering the
research on linking each of the three measures of the corporate governance to each of
the concepts of the performance of MFIs. By replicating this study at other
environment, it may help to develop a theory related to the link between corporate
governance and performance of MFIs.
5.4 Conclusions
This study investigated the correlation between governance and performance of
MFIs, with the case study of Rwanda. It was intended to find out the correlation
between the corporate governance mechanisms and the performance of Rwanda
MFIs industry. Four mechanisms were considered for the corporate governance,
namely: the board size, the board composition, the non-CEO duality and the
supervision. While the performance of MFIs was looked at through MFI’s triangle
made by the impact, the outreach and the sustainability.
Basing on the findings of the study, the researcher concludes as follows:
On board size, there is a correlation between the board size and the social economic
living conditions, and there is no correlation with the economic living conditions of
customers of MFIs in Rwanda. Therefore the conclusions are mixed on the
correlation between board size and the impact of MFIs on their customers.
213
The analysis of correlation between board size and outreach of MFIs in Rwanda, the
researcher found that there is no correlation between the board size and the increase
of the number of customers of MFIs in Rwanda. Similarly, there was no correlation
between the board size and the increase of the number of loans issued to MFIs in
Rwanda. As regards the findings on the link between the board size and the
sustainability of MFIs in Rwanda, the conclusions are that there is no correlation
between board size and the debt recovery. The same conclusions were found for the
board size and the profitability of MFIs in Rwanda; the researcher found that there is
no correlation between board size and profitability of MFIs.
On the board composition and the performance of MFIs in Rwanda, the researcher
concluded that there is a correlation between board composition and the social living
conditions of MFIs’ customers. The researcher also concluded that there is no
correlation between the board composition and the economic living conditions of
MFIs in Rwanda. The findings on the correlation between board composition and
impact of MFIs on customers’ living conditions were also mixed.
The findings on the link between the board composition and the outreach of MFIs in
Rwanda were as follows; the board composition was found to have no correlation
with the increase of the number of customers. But it was found that board
composition has a link with the increase of the number of loans issued to customers
by MFIs in Rwanda; this conclusion is also mixed.
As far as the findings on the correlation between the board composition and the
sustainability of MFIs in Rwanda are concerned, the researcher found that there is a
214
correlation between the board composition and the debt recovery as well as with the
profitability of MFIs in Rwanda.
The results on the correlation between the supervision and the performance of MFIs
in Rwanda brought the researcher to conclude that; there is a correlation between the
supervision of MFIs and the social living conditions of their customers in Rwanda.
But the findings show that there is no correlation between the supervision and the
economic living conditions of MFIs’ customers in Rwanda. Therefore, these findings
show a mixed conclusion on the correlation between the supervision and the impact
of MFIs on their customers’ living conditions.
The research findings on the link between the supervision and the outreach of MFIs
in Rwanda, similarly the conclusion is mixed because; there is a correlation between
the supervision and the increase of the number of customers of MFIs in Rwanda. In
contrary, there is no correlation between the supervision and the increase of the
number of loans issued by MFIs to their customers in Rwanda.
As regards the correlation between the supervision and the sustainability of MFIs in
Rwanda, the findings were not mixed given that the researcher found a correlation
between the supervision and the debt recovery as well as the profitability of MFIs in
Rwanda. Basing on the research findings, there is still a lot for research in line with
the link between corporate governance and performance of MFIs by extending the
study to other countries in the region or elsewhere in the world, or even on the
banking industry in Rwanda.
215
5.5 Recommendations
Basing on the findings and the conclusions of this study, the following
recommendations were made:
1. To the Government of Rwanda
As findings show, the Government of Rwanda has to strengthen the MFIs’
supervision and monitoring system, especially with certified external auditor; as
mentioned earlier, some MFIs failed in the years 2005-2006 because of the lack of
rigorous monitoring and regulatory mechanisms on the side of the central bank of
Rwanda.
Rigorous monitoring system will enable MFIs to attain their performance objectives
and targets. If external audit is strengthened, the CEOs will try to strengthen the
internal auditing in order to show his or her performance to the board of directors
and thus maintain his or her position.
Basing on the findings of this study, the Government of Rwanda should continue to
implement the Non-CEO duality because when the CEO is also the chairperson of a
company, the company tends to increase the agency problem; where by the CEO
controls the board of directors, as a consequence, the role of supervising the CEO is
lost by the board of directors. If such situation happens, the MFI will tend to the
failure. To avoid that failure, the independence of the board of directors has to be
kept as well as the non-CEO duality structure of the leadership should prevail.
216
2. To the MFIs board members in Rwanda
As the findings show, supervision is correlated to the sustainability of MFIs. Boards
of directors should supervise the CEOs closely. This supervision will reduce the
agency cost -which is one of the causes of the failure of MFIs, thus increasing the
performance of MFIs. Once the performance increases the board of directors builds
its reputation on the side of shareholders. To do so, board of directors has to set up
specialized subcommittees, the audit committee, the nomination committee and the
compensation committee, in order to strengthen its supervisory roles.
3. To the management of MFIs in Rwanda
As the management of MFIs plays a very big role in the performance of the
economy, we recommend that senior managers should implement strategies set by
their boards and work as a team in order to enhance the performance of the MFIs.
Once the strategies are set, the management has to implement them. The
implementation of those strategies will help both CEO and board of directors to
attain the goals of the MFIs. Strategies may be good as stated, but if they are not
implemented, they will loose their goodness status.
4. To the shareholders of MFIs
Because one of the ways of the resolving agency conflict is that of aligning the
management and controllers by incentives, we therefore recommend that
shareholders should provide incentives to board of directors. If board members are
given incentives, they will tend to be committed to their job of supervising the CEO
of the MFIs. If the CEO knows that the board of directors is committed to supervise
him or her, then he or she will work hard in order to keep the performance high and
keep the position.
217
As the CEO is the one who works on a daily basis in the MFIs, we recommend that
shareholders should find time to discuss with the Management about some matters
regarding the MFIs; and not only to always rely on board members for the evaluation
of the CEO performance. This will make the board members work hard in order to
show the shareholders that whatever they do matches with what the shareholders will
find with the CEO. At the same time the CEO will feel comfortable by the fact that
he or she meets the shareholders instead of working with intermediaries.
5.6 limitations of the study
The researcher encountered various challenges in conducting this study; such as the
non responsiveness of some of the subjects under study but it was not a strong one
given that 84.6% responded to the questionnaire. Another limitation was getting
financial data which would help to strengthen the analysis, but the researcher is still
having a thirsty of the financial data to link the corporate governance to the
performance of MFIs in Rwanda. This limitation was due to lack of research mind
set for the leadership of MFIs in Rwanda.
5.7 Area for Further Research
Given the findings and the conclusions, the researcher suggested the following areas
for further investigation:
1. The first area of research could focus on the networking structures of MFIs as
they grow. The research may look at the consequences, in terms of governance,
of getting structured as a network;
218
2. The second research area could focus on the relationship between each
corporate governance mechanism and each variables of the performance of
MFIs especially using financial data;
3. The third research area could focus on which mechanism is really crucial at each
stage of the development of any MFI;
4. The fourth research area could be the relationship between corporate governance
and performance of non-profit organizations;
5. The fifth research area could focus on the ownership considerations on MFIs’
boards, which comprise diverse types of people and are becoming ever more
diverse.
219
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APPENDICES
Appendix I: Acceptance letter
Dear Respondent, to facilitate the access to your point of view on the different
variables which the research is analysing, please would you like to tick the
appropriate number corresponding to your identification and one of the numbers
corresponding to your point of view regarding the variables under study? Your views
will be used anonymously and for the only purpose of the study.
By ticking one of the numbers in the table, the researcher will understand your
opinion as the numbers are explained as follows:
1. Strongly agree (First column)
2. Agree (Second column)
3. Neither agree nor disagree (Third column)
4. Disagree (Fourth column)
5. Strongly disagree (fifth column)
Thank you for your cooperation.
Gustave Tombola Masereri
PhD student at The Open University of Tanzania
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Appendix II: Questionnaire
Identification of respondents
Question 1: Could you please indicate your gender?
1. Male
2. Female
Question 2: Could you please indicate the interval of your age?
1. Less or equal o 21
2. More than 21 and less or equal to 25
3. More than 25 and less or equal to 30
4. More than 30 and less or equal to 35
5. More than 35
Question 3: Could you please indicate your marital status?
1. Single
2. Married
3. Widow
4. Divorced
Question 4: Could you please indicate your study background?
1. Accounting
2. Finance
3. General Management
4. Economics
5. Other
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Question 5: Could you please indicate your qualification?
1. PhD
2. Master’s degree
3. Bachelor’s degree
4. Diploma
5. Secondary school leaving certificate
I. Opinions of respondents on variables under study
Question statement 5 4 3 2 1
Q1: There is no correlation between Small size of the board of directors and the social living conditions of MFIs’ customers
Q2: There is no correlation between Small size of the board of directors and the economic living conditions of MFIs’ customers.
Q3: There is no correlation between Small size of the board of directors and the increase of the number of MFIs’ customers.
Q4: There is no correlation between Small size of the board of directors and the increase of the number of loans of MFIs’ customers.
Q5: There is no correlation between Small size of the board of directors and the debt recovery in MFIs.
Q6: There is no correlation between Small size of the board of directors and the profitability in MFIs.
Q7: There is no correlation between the Big size of the board of directors and the social living conditions of MFIs’ customers
Q8: There is no correlation between the Big size of the board of directors and the economic living conditions of MFIs’ customers.
Q9: There is no correlation between the Big size of
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the board of directors and the increase of the number of MFIs’ customers.
Q10: There is no correlation between the Big size of the board of directors and the increase of the number of loans of MFIs’ customers.
Q11: There is no correlation between the Big size of the board of directors and the debt recovery in MFIs
Q12: There is no correlation between the Big size of the board of directors and the profitability in MFIs.
Q13: There is no correlation between the Outside/Independent/non executive members of the board of Director and the social living conditions of MFIs’ customers.
Q14: There is no correlation between the Outside/Independent/non executive members of the board of Director and the economic living conditions of MFIs’ customers.
Q15: There is no correlation between the Outside/Independent/non executive members of the board of Director and the increase of the number of MFIs’ customers
Q16: There is no correlation between the Outside/Independent/non executive members of the board of Director and the increase of the number of loans of MFIs’ customers.
Q17: There is no correlation between the Outside/Independent/non executive members of the board of Director and the debt recovery in MFIs.
Q18: There is no correlation between the Outside/Independent/non executive members of the board of Director and the profitability in MFIs
Q19: There is no correlation between the Inside/non independent/executive members of the board of director and the social living conditions of MFIs’ customers.
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Q20: There is no correlation between the Inside/non independent/executive members of the board of director and the economic living conditions of MFIs’ customers.
Q21: There is no correlation between the Inside/non independent/executive members of the board of director and the increase of the number of MFIs’ customers
Q22: There is no correlation between the Inside/non independent/executive members of the board of director and the increase of the number of loans of MFIs’ customers.
Q23: There is no correlation between the Inside/non independent/executive members of the board of director and the debt recovery in MFIs.
Q24: There is no correlation between the Inside/non independent/executive members of the board of director and the profitability in MFIs
Q25: There is no correlation between the Independent auditing and the social living conditions of MFIs’ customers.
Q26: There is no correlation between the Independent auditing and the economic living conditions of MFIs’ customers
Q27: There is no correlation between the Independent auditing and the increase of the number of MFIs’ customers
Q28: There is no correlation between the Independent auditing and the increase of the number of loans of MFIs’ customers
Q29: There is no correlation between the Independent auditing and the debt recovery in MFIs.
Q30: There is no correlation between the Independent auditing and the profitability in MFIs.
Q31: There is no correlation between the Internal
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auditing of MFIs and the social living conditions of MFIs’ customers
Q32: There is no correlation between the Internal auditing of MFIs and the economic living conditions of MFIs’ customers.
Q33: There is no correlation between the Internal auditing of MFIs and the increase of the number of MFIs’ customers.
Q34: There is no correlation between the Internal auditing of MFIs and the increase of the number of loans of MFIs’ customers.
Q35: There is no correlation between the Internal auditing of MFIs and the debt recovery in MFIs.
36 There is no correlation between the Internal auditing of MFIs and the profitability in MFIs.
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Appendix III: Interview guide
1. Staff of Central Bank of Rwanda and board members of selected MFIs
1) At what extent does small size of the board of MFIs correlate with the social living conditions of the MFIs’ customers in Rwanda?
2) At what extent does small size of the board of MFIs correlate with the
economic living conditions of the MFIs’ customers in Rwanda?
3) At what extent does small size of the board of MFIs correlate with the increase of the MFIs’ customer number in Rwanda?
4) At what extent does small size of the board of MFIs correlate with the
increase of the MFIs’ loans to their customers in Rwanda?
5) At what extent does small size of the board of MFIs influence the debt recovery in MFIs in Rwanda?
6) At what extent does small size of the board of MFIs correlate with the
profitability of MFIs in Rwanda?
7) At what extent does big size of the board of MFIs correlate with the social living conditions of the MFIs’ customers in Rwanda?
8) At what extent does big size of the board of MFIs correlate with the
economic living conditions of the MFIs’ customers in Rwanda?
9) At what extent does big size of the board of MFIs correlate with the increase of the MFIs’ customer number in Rwanda?
10) At what extent does big size of the board of MFIs correlate with the increase
of the MFIs’ loans to their customers in Rwanda?
11) At what extent does big size of the board of MFIs correlate with the debt recovery in MFIs in Rwanda?
237
12) At what extent does big size of the board of MFIs correlate with the
profitability of MFIs in Rwanda?
13) At what extent does outside board member of MFIs correlate with the social living conditions of the MFIs’ customers in Rwanda?
14) At what extent does outside board member of MFIs correlate with the
economic living conditions of the MFIs’ customers in Rwanda?
15) At what extent does outside board member of MFIs correlate with the increase of the MFIs’ customer number in Rwanda?
16) At what extent does outside board member of MFIs correlate with the
increase of the MFIs’ loans to their customers in Rwanda?
17) At what extent does outside board member of MFIs correlate with the debt recovery in MFIs in Rwanda?
18) At what extent does outside board member of MFIs correlate with the profitability of MFIs in Rwanda?
19) At what extent does inside board member of MFIs correlate with the social
living condition of the MFIs customers in Rwanda?
20) At what extent does inside board member of MFIs correlate with the economic living condition of the MFIs’ customers in Rwanda?
21) At what extent does inside board member of MFIs correlate with the
increase of the MFIs’ customer number in Rwanda?
22) At what extent does inside board member of MFIs correlate with the increase of the MFIs’ loans to their customers in Rwanda?
23) At what extent does inside board member of MFIs correlate with the debt
recovery in MFIs in Rwanda? 24) At what extent does inside board member of MFIs correlate with the
profitability of MFIs in Rwanda?
25) What do you think should be improved in the service rendered by MFIs in Rwanda
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2. Questions to staff of selected MFIs and inside board members
26) What do you think should be improved in the service rendered by MFIs in Rwanda as far as the corporate governance is concerned?
3. Questions to external and internal auditors
27) At what extent does the external audit of MFIs correlate with the economic living conditions of the MFIs’ customers in Rwanda?
28) At what extent does the external audit of MFIs correlate with the economic
living conditions of the MFIs’ customers in Rwanda? 29) At what extent does the external audit of MFIs correlate with the increase of
the MFIs’ customer number in Rwanda?
30) At what extent does the external audit of MFIs correlate with the increase of the MFIs’ loans to their customers in Rwanda?
31) At what extent does external audit of MFIs correlate with the debt recovery
in MFIs in Rwanda?
32) At what extent does external audit of MFIs correlate with the profitability
33) At what extent does the internal audit of MFIs correlate with the social living conditions of the MFIs’ customers in Rwanda?
34) At what extent does the internal audit of MFIs correlate with the economic
living conditions of the MFIs’ customers in Rwanda?
35) At what extent does the internal audit of MFIs correlate with the increase of the MFIs’ customer number in Rwanda?
36) At what extent does the internal audit of MFIs correlate with the increase of
the MFIs’ loans to their customers in Rwanda?
37) At what extent does internal audit of MFIs correlate with the debt recovery in MFIs in Rwanda?
239
38) At what extent does internal audit of MFIs correlate with the profitability?
39) What do you think should be improved in the service rendered by MFIs in Rwanda
4. Focus Group discussion with customers
40) How do you find the improvement of your economic living conditions since being a customer of MFIs?
41) How do you find the improvement of your social living conditions since being a customer of any MFI?
42) What do you think should be improved in the service rendered by MFIs in Rwanda
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Appendix IV: Research clearance letter from OUT
241
Appendix V: Letter asking for data collection permission from the National Bank of Rwanda
242
Appendix VI: Data collection permission from the National Bank of Rwanda
243
Appendix VII : Chi Square (critical values)
Degrees of Freedom Probability, p
0.99 0.95 0.05 0.01 0.001
1 0.000 0.004 3.84 6.64 10.83
2 0.020 0.103 5.99 9.21 13.82
3 0.115 0.352 7.82 11.35 16.27
4 0.297 0.711 9.49 13.28 18.47
5 0.554 1.145 11.07 15.09 20.52
6 0.872 1.635 12.59 16.81 22.46
7 1.239 2.167 14.07 18.48 24.32
8 1.646 2.733 15.51 20.09 26.13
9 2.088 3.325 16.92 21.67 27.88
10 2.558 3.940 18.31 23.21 29.59
11 3.05 4.58 19.68 24.73 31.26
12 3.57 5.23 21.03 26.22 32.91
13 4.11 5.89 22.36 27.69 34.53
14 4.66 6.57 23.69 29.14 36.12
15 5.23 7.26 25.00 30.58 37.70
16 5.81 7.96 26.30 32.00 39.25
17 6.41 8.67 27.59 33.41 40.79
18 7.02 9.39 28.87 34.81 42.31
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19 7.63 10.12 30.14 36.19 43.82
20 8.26 10.85 31.41 37.57 45.32
21 8.90 11.59 32.67 38.93 46.80
22 9.54 12.34 33.92 40.29 48.27
23 10.20 13.09 35.17 41.64 49.73
24 10.86 13.85 36.42 42.98 51.18
25 11.52 14.61 37.65 44.31 52.62
26 12.20 15.38 38.89 45.64 54.05
27 12.88 16.15 40.11 46.96 55.48
28 13.57 16.93 41.34 48.28 56.89
29 14.26 17.71 42.56 49.59 58.30
30 14.95 18.49 43.77 50.89 59.70